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Typical pre-teen boys may be as committed to collecting coins as they are baseball cards, but to find 11-year-olds intrigued by the M1 money supply, fiat currency and the silver standard would be a rarity by anyone’s standards. David Morgan, whose interest in silver dates to that tender age, was one of the rare ones—and still is. Although his horizon has expanded considerably since those days, he now stands out among the world’s preeminent silver authorities, investment experts and worldview economists.

All’s been decidedly unquiet on the precious metals front since David’s last exclusive interview with The Gold Report this past April. Back then, U.S. Treasury Secretary Hank Paulson had used the term “financial crisis" more than five times in a recent speech, circumstances in which, as David put it, “the attraction to precious metals becomes more urgent.” At that time, he also speculated on whether there is enough silver above the ground if just 10% of the baby boomer population were to put 5% of their net worth into silver. According to David, the answer is a resounding “no.” David sees some silver lining the recessionary thunderheads, and a spring that may bring see an “Obama Rally” burst forth.

The Gold Report: When you talked with The Gold Report in April, silver's 200-day moving average was $14.66 and gold's was $785. To say we've experienced turmoil since then is something of an understatement. What's your view of what's happening in those markets today?

David Morgan: Both silver and gold markets have become victims of the credit crisis, which actually started in August of 2007. Things really got going to the downside on the annual rollover of August 2008 and that has continued. If you look at gold irrespective of the dollar—in other words, vis-à-vis other currencies—it's doing quite well. And if you look at gold in U.S. dollars vis-à-vis any other market such as the Dow Jones, the S&P 500 or the oil market, it's actually holding up better than most markets.

Silver is doing not as well as gold, but better than the base metals. And since silver is really an industrial metal and a monetary metal, you would expect it to perform during recessionary times as it has—better than the base metals but not as good as gold.

TGR: When do you expect silver and gold to bottom out?

DM: We have seen the bottom already. Of course, you never know a bottom until a good amount of time later, but all kinds of technical indicators as well as sentiment indicate to me that we have seen the bottom I announced this to our members last weekend.

TGR: How will you recognize the bottom?

DM: On a weekly chart you can see a weekly bottom; on a monthly chart, a monthly bottom. You can only know a bottom for certain by hindsight. But right now, as I said, technically and sentiment-wise, we have hit a bottom. Sentiment is awful, even some gold bugs are predicting gold to go lower. Having said that, no one can call a bottom exactly every time.

TGR: So most gold bugs are looking to see gold going even lower.

DM: I wouldn't say “most.” I know that some are. And it's, again, sentiment. Things have become so bad in all the markets that even the gold bugs are starting to question whether gold can maintain these prices. Technically, silver's already hit the major uptrend line, but gold hasn't. The major uptrend line for gold lies around the $640 level. Is it going to get there? No one really knows.

The volatility is what we're talking about. The volatility is extreme in all markets, gold being one of them. Just since the credit crisis really manifested in August of 2008, we've had days where gold was up by $90 and other days where it's been down $50 or so. The swings are considerable. Going forward, I think there will be more of the same, days when gold's up well over $100 and probably down the same.

TGR: You said in the past silver tends to be more volatile than gold. Considering the swings you anticipate for gold, what do you expect to see in silver?

DM: Silver, of course, is a smaller market, so it's subject to greater moves both up and down. You may see some dollar up days where silver just takes off and goes up a couple or three bucks at a time. I don't think you're going to see that on the downside until we get much higher. In other words, you won't see a $2 down day from the $10 level, but you may see that once we approach the $25 or $30 level.

TGR: Jay Taylor (who produces the weekly Gold, Energy & Tech Stocks newsletter) says that from his perspective silver does well in an inflationary environment—better than gold—and in a deflationary environment, gold does better than silver. Do you agree?

DM: Jay's right. Professor Roy Jastram's The Golden Constant (The Golden Constant: The English and American Experience, 1560-1976 , New York: Wiley, 1977) really shows that gold holds its own in a deflationary environment.

Silver doesn't or hasn't in the past and there could be several reasons for that. The primary one is government interference in the market place. On a per capita basis, the amount of silver per person was much greater in the past than it is today. I don't know if it will do well in a deflation or not. I suspect that this time silver will do relatively well in a deflation. Look if we use silver against oil, or the Dow, or base metals it is doing fairly well, the problem is people do not know how to correctly evaluate (value) assets. History repeats, but it doesn't repeat exactly.

The reason silver probably would do well in a deflation this time is because there's so little available and it holds every monetary aspect that gold has. It's rare, it's divisible, it's a store of wealth and it's fungible—in other words, every ounce is like any other ounce regardless of whose stamp is on it. Because of those facts, I believe that people who probably are priced out of the gold market will go to the next best thing and, the next best thing is silver.

TGR: What causes silver to not perform as well as gold in a deflationary environment? Is it the fact that silver is also an industrial metal and industrial uses decline during deflation?

DM: That's the primary argument and it has merit in today's world but if you read my website and look at the history of silver as money as researched by Charles Savoie you will get a far more accurate picture. In a deflationary environment, since 70% of the base metals produce silver, if there's a big recession, there will be a lot less silver available because there'll be a lot less base metal mining production. So supply actually contracts automatically in a deflationary environment. So, again, on a per capita basis, there may be less silver minded per person in a deflation than there is in an inflation.

TGR: Why wouldn't that drive the price up?

DM: It could. That's my point. That could cause the price to go up. Again, the market knows more than anybody. However which market are we talking about the free silver market or the paper derivative silver market? I believe that the supply of silver is so small relative to the population base that it won't take much new buying to carry silver far, far higher. You have to remember that silver hit $50 an ounce in 1980 and there was roughly four times more silver available above ground than now. Also, the money supply was about one-seventh the size that it is now. So if you use those facts—that the silver supply, instead of being 2 billion ounces of fine bullion, is less than 500,000 ounces and that the money supply, M1, is about six or seven times greater—that shows you a high, high potential that silver could certainly go up.

TGR: Would you advise your newsletter readers to look at obtaining physical silver and, if so, coins or obtaining it through COMEX?

DM: Both. Anyone new should start with coin silver and the reason for that is it's money of last resort. People always talk about gold as being the money of last resort and certainly it is in a sense, but in a practical way, it's not.

If you had a collapse of the currency where you actually had to barter, it'd be pretty tough to use a one-ounce gold coin to buy gas or bread. But with silver that could be accomplished easily. I'm not saying that's going to happen. I'm just doing a thought experiment here. Silver is more divisible, it's a smaller value per unit, and if you have coins, you're in the best shape for that scenario. Once that's established, then I think it can go to investing in silver bars.

As far as taking delivery off the COMEX, that's usually for higher-end investors because one bar is 1,000 ounces, so that's like $10,000 per bar and a lot of investors aren't capable, or it would represent too much of their net worth to take that much silver in one lump form.

TGR: Going back to silver and gold, we have mining companies whose stock has been pummeled in both metals. As you indicated earlier, the amount of silver above the ground is now less than it was 25 years ago. With the shortage in supply, why are these stocks getting pounded so hard? And what will it take in the silver market to start seeing mining stocks increase?

DM: Not to sound trite, but the truth is there's just tons and tons of selling pressure. Most of the hedge fund managers and others—but primarily the hedge fund managers—who own these equities were leveraged. They have to sell to meet margin calls or liquidations.

The juniors are very illiquid, meaning that aren't many bids out there. Some are going no bid. In other words, I might be offering my XYZ mining stock that's a junior mining company and nobody wants to buy it at any price right now. That's usually a bottom.

What it's going to take to move the market forward is for people to gain confidence in the system again and for the metals to lead. In other words, I think if you see some stability in the metals—people will regain confidence

TGR: It seems until silver makes a turnaround that in many cases the juniors are under tight balance sheet pressures to even keep the doors open. Does that mean it's time to get into juniors or do we need to wait until we really establish the bottom?

DM: It depends on the individual. First of all, you've got to be extremely selective all the time and especially now where a lot of these juniors will never come back because they cannot raise the cash required to stay in business. So you have to look at the burn rate and how much money they have in the bank. So that's step one.

But if you're a conservative investor, you're actually better off waiting for the bottom to be established, make sure that it is a bottom, and wait for the growth to start into the stock again before you purchase it. It's a much more efficient and professional way to enter any stock, even the mining stocks. However, most people don't have the discipline and they hate paying up.

With the mining companies, it depends on the type of company an investor is buying. Most people will buy the stock based on the discovery, not as it becomes a mine. There's a very well-defined curve of how a discovery becomes a producing mine. If you know what you're doing, you can actually do quite well just being patient and picking the right point to enter the market.

TGR: Back to your point about explorers versus producers, do you have a bias right now in the marketplace to suggest one or the other to investors?

DM: I've always had a bias and my bias has been very consistent. I like small producers with exploration potential. That, to me, gives the greatest risk-to-reward ratio. For example, if you're producing a million ounces a year, going to 2 or 3 million ounces might not be a big task. In contrast, if you're Newmont Mining Corp. (NYSE:NEM) , to double your production is impossible.

Now have we had tremendous success with exploration companies early in this cycle. In fact, Minefinders Corporation (MFL.TO) (AMEX:MFN) is one of them. I picked that stock for our subscribers at 90 cents and told our subscriber to sell it at $13. Minefinders fits the discovery-to-production curve I spoke about earlier. And again, if you look at that curve and know what it looks like, there's a pretty safe entry point to buy Minefinders back, even though you're not going to buy it at 90 cents again. You can buy it and as it starts into production, you actually will get some growth out of that stock again.

TGR: Do you have some companies you can share with us that fit into that small producers going toward production that sit in the right part of the curve?

DM: Endeavour Silver Corp. (TSX:EDR) (AMEX:EXK) is one. First Majestic Silver Corp. (TSX:FR) is another one, and Impact Silver (TSX.V:IPT) . And I like SilverCrest Mines Inc. (TSX.V:SVL) a great deal. It hasn't started producing yet, but it will. I think it's got a lot of potential. Another one is Great Panther Resources (TSX.V:GPR) , but unfortunately, although it's a producer, Great Panther hasn't got a lot of cash as a buffer. Some of these companies were fortunate to have a fair or, in some cases, a large cash buffer that will enable them to continue on during this downturn and others are not.

TGR: Can you comment on Minera Andes Inc. (TSX:MAI) ? I think that's one that you've followed in the past.

DM: Minera Andes is one that I really, really like. The stock has underperformed in my opinion. They are based here in Spokane. I know Allen Ambrose quite well. He's one of the most under-rated CEOs in the business as far as I'm concerned. We have been down to the property a couple of times. They keep discovering more and producing at higher rates, so they're one of those producers with exploration potential I talked about earlier. It's one that I just bought and held. I never worried about it. In fact, I should disclose every company I've named so far I own.

TGR: I think you also were following Rimfire Minerals Corp. (TSX.V:RFM) .

DM: Yes, Rimfire is another one that I own. It's more of a highly speculative stock and the amount I own is very small because when I own something I have to follow it more closely. What I like about Rimfire is the management. They're very clear on what they're doing, which is to discover something elephant sized and sell it off at a profit for their shareholders.

TGR: Premium Exploration (TSX.V:PEM) is another one that you've also been following.

DM: Yes, Premium is one that I like, again, as a speculation, small amount. But what I like about Premium is where it's located and the metal they're looking for. They're a platinum group metal explorer and have some good project potential near the Stillwater Mine in Montana. Platinum is 15 times more rare than gold and I still believe that the white metals, including silver, are going to do well longer term, so it's a speculation.

TGR: Have you been looking at Geologix Explorations (TSX.V:GIX) ?

DM: Yes. Geologix is one that's on the website in the Members Only section. You can read what's been written by one of our research associates. There's only one caveat. I'm not a big proponent of silver equivalent, gold equivalent and that kind of thing, but it's a methodology used throughout the industry, and with Geologix you're looking at gold equivalent something like 7 to 8 million ounces, so that is a huge amount of resource. That's a big, big, big asset.

The problem with a big, big, big asset is you need big money in order to further the project and that's where the company is. So the upside is it's huge; the downside is that in this environment, it is going to be difficult to raise the kind of capital required to move it forward. So, do I like the company? Yes; fundamentally, I like it. Is this is the time to get it? It depends on your risk tolerance, because it may be difficult to get the company funded to move it forward.

TGR: So is Geologix a potential takeover candidate?

DM: It could be. There are just too many unknowns for me to speculate on it now.

TGR: As you look into your crystal ball of 2009, if the silver and gold prices begin to move up, as we hope, how quickly will the seniors follow in terms of profitability and then share price? And then how soon will juniors follow?

DM: Right now what I see going from now until 2009 is a peak in probably the third week of March 2009, which perhaps will extend into April. I will be looking carefully at the indicators that have provided us such good information to call it as I see it so our paid subscribers can take some profits.

Mining stocks—both seniors and juniors—will both be increasing. Will they hit new highs? At this point I'd lean toward the idea that they won't. Why? Because as we talked about earlier, the debt liquidation will continue, where people have to raise cash and have to get it converted to U.S. dollars, there will be credit card problems, and more problems in the mortgage sector.

TGR: Does this nice move into March or April that you foresee include the spot price of physical gold and silver?

DM: We're looking at everything. We're looking at silver and gold, the metal. We're looking at the mining stocks, top tier, mid tier, and juniors, the ones that can hang on. We're also looking at the general equity market and the oil market. So we're going to see, in my view, kind of an Obama rally; good times are back again. Confidence comes into the system, which is basically just faith. But people start to move money again. The velocity increases and they start spending and things are going to get better and it's ONLY a belief. That's going to carry through for the first three months or so.

And then there's a possibility, and a strong one, that we'll see the reality of the situation, that things really aren't getting better. Unemployment really is still high. There really aren't new jobs being created. Oil prices are moving up again and it doesn't look like they're going to be coming back down and that type of thing. So that could take us back down.

So that's what I see right now. . .when the money starts flowing again, as I expect under what I will loosely label the Obama rally, you will see the top tiers move first and then the juniors shoot up after that.

TGR: But it sounds like you see a murky period coming in March, where a combination of recessionary pressures or announcements or a realization that we are still in a recession, along with potential liquidity issues, might bring that whole market back down.

DM: Absolutely. The way I see it is we're going to run out of cash at some point. As I said earlier, but to reiterate it, there's only so much cash in any market and it's going to be devoted to whatever the market chooses. I think the market's going to choose gold and silver over most other asset classes. So relatively, on a percentage basis, things like the XAU will do better than the airline stocks, for example, and probably a lot of other sectors. However, there's only so much money that's going to pour into the market. People will continue to seek assets without counter-party risk and that means silver and gold. However, once that money is exhausted, you're going to get a top.

TGR: That's why we need people like you to help people figure out what's going on.

From now until the end of this year, David Morgan is offering free subscriptions to The Morgan Report. You will be given full access to the Members Only portion of the website and read all of his recommendations, access the webinars, the seminars, the audio updates, the special reports, and the alert service.

Seduced by silver at the tender age of 11, David Morgan started investing in the stock market while still a teenager. A precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the silver-investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems ahead and reasons for investing in precious metals. David considers himself a big-picture macroeconomist whose main job as education—educating people about honest money and the benefits of a sound financial system—and his second job as teaching people to be patient and have conviction in their investment holdings. A dynamic, much-in-demand speaker, David’s educational mission also makes him a prolific author. In addition to The Morgan Report, he writes Kitco’s weekly Money, Metals and Mining Review. His articles have appeared in The Herald Tribune, Futures, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, The Wall Street Journal—and, of course, The Gold Report.

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