The Morgan Report (Editor's note: The following article is made up of excerpts from David Morgan's February newsletter. Mr. Morgan is the founder of Silver-Investor.com)
As we begin this month's report it is admittedly an extremely difficult time in the markets. This month's quote is more from a practical point of view, whereas in the past, much of our focus has been on more generalized themes. Point blank, the metals themselves have been the best performers of late and this is for several reasons.
First the markets, and here we mean all financial markets, stocks, bonds, currencies, real estates, and even commodities, are in a state of fear right now. We just returned from the annual Gold Show (Vancouver Natural Resource Conference) and can state factually that almost everyone we met was fearful that the precious metals were perhaps topping out and the shares of mining companies were in the doldrums. Upon our return we issued our first alert of the year. We acknowledged that this was the biggest retail gold show in the world. However, rather than glee and an upbeat mood, we saw some long faces and uncertainty abounded. During my workshop, I explained that all markets go through four phases of emotion. First there is pessimism, then skepticism, then optimism, and finally euphoria. We went on to say in that alert that we are far from a top in the metals or mining shares. We are still in the skeptics phase, also known as the wall of worry. We must climb the wall of worry and we will indeed climb this wall and at some point all of the current disheartened gold and silver bugs will rejoice as we enter the optimism phase. At that stage, many will take credit for knowing "all along" that they were smart investors and never really questioned themselves. This is human nature and we see it often. As a reminder, our general philosophy is an investment mentality looking out three to five years at a minimum. We forecast gold to reach at least $2000 per ounce and made that forecast in December 2000, a full seven years ago. This is our minimum target and we are about halfway there, and still the "believers" are skeptical. Gold could go as high as perhaps $4000 or more on a spike. Our long-standing prediction that silver will outperform gold and go to $100 per ounce also stands. We have continually received a plethora of inquiries almost daily about the short-term price movements in the precious metals complex. Let us state again for the record, we are not a commodity trading service and we do not work for Donny Day-Trader. If you are an active commodity trader, that is terrific, as we are free-market oriented and want every human on the planet to be the very best they can be, physically, mentally, spiritually, and financially. We do not answer questions as to where we guess the prices of gold or silver are going next week. Having stated this again, we do our best at intermediate price swings. So those who are so inclined can sell into strength perhaps 25% of their holdings, hoping to buy back at a lower price later, while fully keeping their core position (75%) intact. Two years ago, we began a stop loss on our juniors or speculative picks and this was to keep losses from getting away from us and also to teach discipline. Some objected at this practice, but it forces us to continually seek the best "buy and hold" juniors we can find. Our goal in the speculative section is to find winners that will become notable investments much later after we spot them - a difficult task to say the least. As we stated in our alert, "No one knows how much more damage we will see to the equity markets. The mining shares have been hit but are starting to show resilience. I know it is tough to break through when so much fear exists, but it is not worth selling at this point, because the bottoming process is starting to take place. Is this the short-term bottom? Frankly, we doubt it and think a good solid buying opportunity will become available in February. However, the big picture is clear. The financial system is under such stress that investors will be seeking areas that they trust and expect to do well in the future. This is clearly the precious metals arena. We do not know exactly when this shift in thinking by the general investing public will take place, but it will." Later in the alert we stated: "On a very short-term basis, gold and silver have not reversed to a downtrend yet. If we get a gold close three days (in a row) below $880.00 and we see silver close three days below $15.80, then we expect to see support areas tested. This is fully what we do think will happen, but until it does, we still remain in a high-level consolidation period. To break into a new high, look for silver to close over $16.44 and remain there for three full days." We want to be correct for you and making a call here is difficult - we may be feeling the fear as well. We suggest careful buying in here on the mining shares. We may see the metals pull back and it would not surprise us to see gold and silver sell off a bit and the shares stay put or move up. We know this is going out on a limb, but the shares seem to be signaling a bottom, and our key indicators are suggesting the bottom is nearly completed. We have been in this sector a very long time and yet the market still humbles us from time to time. We know from our experience that buying when fear runs this high is most likely the correct action. We ourselves are buying selectively here and plan to continue our purchases over the next several weeks. The Big Picture The main issue we have been asked most recently is the inflation/deflation scenario. Since we have been through this before, we are going to examine it again, but from a different and most important perspective. This perspective is how the financial system's "breakdown" is going to affect YOU! If we get a deflationary depression or an inflationary depression the end result is similar: depression. In both cases there is a marked decrease in business activity, the general public is not able to afford the lifestyle they held a few years earlier, and a general mistrust of the financial markets and people in charge grabs the conscience of the public. The main difference is that many think that in an inflationary depression any leveraged investment they hold will do quite well. At the essence, these people want to "borrow themselves rich." This is precisely what was taking place in the real estate markets through perhaps 2005 or so. Now it has been clear to us that the Fed and other central banks will do their best to continue to issue credit (commonly referred to as printing money) and keep the system from collapsing, or, better stated, contracting. A credit contraction usually leads to less money in the system and leads to deflation. We have remained of the view that the central banks do have enough firepower to keep the system alive a few more years and also maintain the view that significant economic problems will not manifest fully until after 2010. At the current time, the banking system is very much extending as much credit into the system as possible, but you must ask the key questions of yourself. These key questions are:
So, even though we are currently in a financial system where credit continues to be expanded, the net result is that the true price of many assets is only going up in "nominal" terms. Certainly, if the Federal Reserve is successful, the stock market may move even higher but not significantly in any real terms and most likely will continue down when measured against gold. The main concern is the U.S. dollar will be phased out as the international monetary reserve currency; it will, but in a different way than most think. Many are under the impression that the Euro or perhaps some other currency will replace the U.S. dollar, and we don't rule this out entirely, but we think it is much more important to study clearly what is taking place in front of us if we just open our eyes. We might want to take a step back in time and read the following: The Bankers' Manifesto ties in with the U.S. Senate Document No. 43, 73rd Congress, 1st Session (1934), which states: "The ultimate ownership of all property is in the State; individual so-called 'ownership' is only by virtue of Government, i.e., law, amounting to mere 'user' and use must be in acceptance with law and subordinate to the necessities of the State." Remember in a true hyperinflation, the currency is destroyed and basically the bankers lose. That is something that just does not make sense, especially if you read the rest of the Bankers' Manifesto below. Caution: source is believed to be accurate but I could not verify in the law library. However please take a moment to think what is at stake and, from your own experience, how bankers act? THE BANKERS' MANIFESTO OF 1934
Some readers may think that the idea of bankers manipulating asset prices and striving to achieve greater control over a nation's wealth is "conspiratorial" in nature, especially when realizing the above quote was made over seventy years ago. The reality is the bankers for the most part hold similar world-views, act in their own self interest, and behave in a similar manner. A conspiracy probably not, but their ideology is that they know what is best for you. Right now, many nation states are buying gold quietly, and steadily they accumulate. Secondly, the nations that hold balance of trade surpluses are moving money into commodities, and this trend will continue, because the thinking at this scale is similar to our own personal thinking. We rather hold something of real worth that is needed than some debt instrument issued by a government of questionable integrity. However to remain consistent, the currency game will be played by the banking establishment, convincing most that the "correct" currency is a safe harbor. Later in the credit cycle this will be proven false. Coming back to this month's quote, nothing beats the real thing. In other words, owners of the noblest metal - platinum - are doing better than the owners of the platinum producers currently. This has been factored into our thinking from the beginning. We see that the fear is driving the price of all precious metals higher and the mining shares are stuck at levels lower than their previous highs. At some point, and we think this year, the general investing public will wake up to the fact that the place to be will be in the resource sector and particularly the precious metals. Since almost all retail investors are reluctant to purchase real metal (coins or bullion) we expect to see a huge move into the mining shares, because in today's world almost all investors have access to some online stock trading account. Most people take the path of least resistance and will do their purchasing of gold and silver by way of the mining equities. The tough call for us is how this will manifest between now and what we think is inevitable. At this point we think the path of least resistance is up for the metals and shares peaking sometime this quarter. At that time we will make our best call as to possibly taking some profits but not all. Our concern is, as the credit situation unfolds further, the general stock market might resume its downward profile and take the mining shares along with it. We are convinced that at some point there will be a divergence where the mining shares will begin moving up either faster than the general stock market, or opposite to the general stock market. However, exactly how this will unfold is difficult to predict at this point. In summation, we will ask a rhetorical question: how did people profit in the last depression? The answer was to have little or no debt and lots of cash. We truly think that this time it will be the same situation even though it looks like the credit expansion will continue. However, you MUST remember - cash in the 1930s was gold, and your cash from this point forward should also be gold and silver. We continue to look for brighter days ahead for the precious metals sector as we finish climbing the wall of worry and move into the optimistic phase. For those holding juniors that are thoroughly depressed, we will state that these shares will fly again but perhaps not until we reach the optimism phase. Your publisher was asked to comment on how silver performed in the last Great Depression and many are confused. The U.S. Government made holding gold illegal in 1933 and the 20% of the gold was turned in (that is correct - about 80% of the gold DID NOT get turned in) for currency. Once this trade of gold for paper was accomplished the Federal Government revalued the gold to $35 per ounce. What most people do not know is that silver was also revalued by the same Federal Government but a bit over a year later. Silver hit bottom at 25 cents per ounce, but the U.S. Treasury was authorized to pay 50 cents per ounce for it after passage of the 1934 Silver Purchase Act. Additionally, the U.S. Treasury was authorized under this Act to pay up to the statutory value of $1.2929 (the actual Constitutional value) per ounce. The U.S Government purchased 113 million troy ounces. Most of this was purchased nearer the 50-cent level, and the Treasury turned around and paid for this silver with silver certificates, which were of course valued at the statutory price, yielding a huge profit to the Federal Government on seigniorage. In other words, the Treasury issued silver certificates worth one dollar to buy silver at perhaps 50 cents per ounce. (Remember a statutory dollar is 371.25 grains of fine silver - not a troy ounce). Eventually the U.S. Government ended up with over three billion ounces of fine silver by 1963. Today the U.S. Government holds no silver; at least, that is what the Treasury reports. As an aside, at one time the Defense Department held silver as a Strategic Reserve - a classification gold has never held, to my knowledge. The story is more complex and it will not be addressed fully here. For those interested, we suggest going to our main Web site and reading almost anything written by Charles Savoie and you will get a clearer picture of well researched and documented evidence of how silver has been treated through monetary history. The point we wish to emphasize is that the same government that revalued gold also revalued silver higher, and silver was not confiscated. Those who held silver did not regret it, even though you commonly hear how poorly silver did during the last depression. To be complete, the government did impose a heavy tax on profits of all silver transactions.
Interestingly, the report concludes that, "the use of silver biocides for preserving timber products and preventing mildew has increased significantly ... It is quite likely that silver will be able to capture part, if not all, of the estimated maximum worldwide market of 120-130 Moz that is available for wood preservation." The conference was well attended by investment relation firms and chief executive officers from a number of the more prominent silver producers, including Silver Standard, Endeavour Silver, and Silver Wheaton. Endeavour Silver's Bradford Cooke was particularly upbeat about the prospects for significantly higher silver prices this year, and also in regard to his company's expected increase in production going forward. Personal Notes: We are looking to spread the word on the virtues of investing in silver and the resource sector and wish to add someone that is experienced in Internet marketing. We have tried countless advertising and marketing campaigns that have produced little results. If you or you know of someone that has a proven track record of building Internet based businesses please send your information to support@silver-invstor.com. Until next month, wishing you health above wealth and wisdom beyond knowledge, David Morgan
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Mr. Morgan does consult on a paid basis both with private investors and various companies. Mr. Morgan recently consulted with Hunt Mountain Resources. Investing and speculation are inherently risky and should not be undertaken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein. |
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David Morgan, founder of the Silver Investor, started investing in the stock market well before turning 18 years of age. He then spent four years earning a degree in Engineering. Later he went on to obtain a degree in Finance and Economics. Several years ago, Mr. Morgan put his life long study of free-market economics to work researching the economy, stock market behavior, precious metals, especially silver. Although very familiar with gold, Mr. Morgan believed that silver needed more exposure and would be utilized increasingly as technology continued to demand more and more of the metal. He has followed the silver market daily for over thirty years. Much of this website is devoted to education and we encourage you to spend time here and refer others.