Both industrial and precious, Silver offers unique investment characteristics...

OFTEN CALLED the "Poor Man's Gold", silver is in fact poised to outperform gold according to "Silver Guru" David Morgan of The Morgan Report and www.silver-investor.com.

A silver investor from the age of 11, David Morgan started investing in the stock market while still a teenager. Armed with degrees in finance and economics – as well as engineering – he considers himself a big-picture macroeconomist whose main job is education.

A dynamic, much-in-demand speaker, David's educational mission also makes him a prolific author. In addition, his articles have appeared in The Herald Tribune, Barron's and The Wall Street Journal.

Looking ahead, "The amount of silver mined meets industrial and investment demand. We've reached equilibrium," Morgan explains here to the Gold Report. But the end of supply deficits doesn't mean the end of price appreciation...

The Gold Report: You stated last June that silver will outperform gold by about 30%. What will be the catalyst?

David Morgan: Well, there's several. Silver is the bipolar metal, as I refer to it occasionally, because it's both an industrial metal and a monetary metal.

If you look at the industrial side, it's very bullish even in these recessionary times, meaning that silver needs to be used in all kinds of industrial applications. There might not be as much manufacturing on a global basis as there was during the times when the economy was doing better from 2000 to 2007. However, a lot of manufacturing is still taking place. As it occurs, there's a tradeoff, with less manufacturing in some sectors and more in others. The amount of cell phones in China and India continues to grow. Another one would be solar energy, which is projected to increase rapidly over the next decade.

There's a big impetus by several governments, again on a global basis, to install more green energy. Solar is at the top of that list. Silver plays an important part in that story. On top of that, you've got water purification, which is something I was talking about many years ago and continue to because silver is a very unique biocide. Due to that, the EPA has actually okayed silver's use in bottled water, which very few people know about.

Then, of course, in food processing, the unique properties of silver are used in meatpacking plants where you'd have silver tip appliances like the saws and cutters, etc., because for sterilizing purposes they do not spread any bacteria. Some of the new packaging plastics have a bit of silver in them on a microscopic level. Once the food is packaged and you have the silver in there, it's going to prevent any kind of spoilage or bacteria growth. On top of that, you've got other applications like the radiofrequency identification tags, and on and on the list goes.

The other side is investment demand. Here is where I think there's a little confusion on this subject, because a lot of the main studies in silver just emphasize investment demand as coin demand. It is talked about as being 5% of the market. If you look at 660 million ounces of silver being mined presently, and you take 5% of that, you're looking at 33 million ounces. An accurate number for coin demand is somewhere between 30 and 40 million ounces on an annual basis, but that's coin demand only. What very few of these studies really emphasize, which is really a big part of Silver Investment demand, is how much of the commercial bars are used for investment purposes.

Let's look at the largest silver ETF (SLV). It holds roughly 300 million ounces of silver in commercial bar form. But it's all for investment purposes. So, there's more to the investment story on silver than most people realize.

TGR: Why aren't we seeing the pressure in the market yet with all the industrial demand?

David Morgan: I would say the pressures are there right now. Have they started to build up yet? Perhaps. They're not as strong now as they will become over the next few years. As there is more and more silver demand on the industrial and on the Silver Investment side, the price is going to go up.

You've got to look at where Silver is at right now. It's certainly off the $21 nominal high that we saw many months ago. We're still hanging around $18 compared to the $5 or less it was based at for almost 20 years. That's quite a run, and even in inflation-adjusted terms, it's a pretty good return on your money. Is it going higher? Yes. When is it going to start? I'm not sure. It's going to be in this idling period for a while.

The dynamics are so strong that I don't see it continuing all year. I believe strongly that the closing price in December 2010 in silver is going to be above the $21 level. In other words, silver will be making a new high this year.

TGR: Don't you think that silver production has ramped up to meet the current and potential future demand coming within the next year or two, save a crunch by an industrial giant like China?

David Morgan: Yes, I do. This isn't opinion. This is based on some of the best studies on silver, which I have subscribed to for years. The amount of silver on an annual basis mined meets the silver demand on an annual basis for all industrial and investment demand. We've reached equilibrium. That wasn't the case for 15 or 16 years when there was a deficit and it took the silver above-ground stockpile from 2 billion ounces to roughly half a billion ounces of silver.

Over the last few years, the big ramp-up in the commodity boom has taken a lot mining activity to much greater levels than it was about a decade ago. And because of that fact, there's been a lot more silver coming out of the ground on an annual basis and a lot of it's been because of the base metals boom. Anyone that studies silver even slightly these days knows that about 70% of silver comes from a result of mining other metals like lead, zinc, copper or gold. I expect actual silver mining to increase with the primary silver producers over the next couple of years. I'm not so sure that it will on the non-primary mines and some of these other large base metal miners that produce a great deal of silver. In fact, these huge mining houses actually produce the most silver, even though it's not their primary metal. There isn't a huge demand for all the base metals, but it's still there.

As you say, China's the driver, so it's hard to predict because there's a good case being built that China is ahead of itself. There's going to be a decrease in their productive capacity for a while. They've basically overextended their credit system as the United States did several years ago. We may have a pause in the market on that side. Longer term, I think we're going to have to see more demand on both sides. I don't think that the mining activity can keep up over the next decade. I think if you look out over a 10-year timeframe, the amount of investment and industrial demand for silver will be greater than an increase in the mining activity that's available over the next 10 years.

TGR: According to very recent reports, China is still experiencing a 12% per year growth rate. This has to apply some pressure at some point to silver.

David Morgan: You've got to look at how that number is derived. The Chinese are starting to do what the US is doing. In other words, China is not a consumer economy where 70% of the growth of the economy is based on consumption, but it's much more based on consumption than it was a decade ago.

What I want to point out is not that it's really become a consumer society, but it is trending that way or more so. How much funny money was put into the system by the Chinese to get that growth rate? That's where you really have to think about common sense economics. If you go back and look at the US and you've got to print $5 of funny money to get $1 of GDP growth, how much real growth are you getting? You are seeing the same thing now with China as they're throwing out a lot of funny money into their system in order to produce that 12% growth rate.

You got to look behind the numbers sometimes to see what's really going on. Unfortunately, that's the case for the Chinese right now. There are areas that they probably overbuilt. They've got excess capacity. In other words, they've basically caught on to the Keynesian system, where top-down control of the economy is going to do great according to the political powers, but in the long term is fatal. In some ways, they're very free market and in other ways they're a very controlled economy. I don't want to sound like I'm talking out the both sides of my mouth. It's actually a fact. That's true of the US as well. There's a lot of management to the economy and there are some pockets that are truly free market, but not much in either case.

TGR: When is the best time to get into Silver Investment?

David Morgan: From the standpoint of the actual metal itself, any time is the right time as far as I'm concerned. You don't have to worry about market timing. I mean, $18 silver is obviously more than it was 10 years ago when you could probably get it at around $5. Again, I believe it's going far higher. It's something tangible, something real and something outside the financial system. When you own silver coins or bars or both, you actually have real money that's recognized worldwide. If you own the real thing, don't worry too much about the price. Buy the real thing. That's where you start your precious metals investing.

TGR: Why is there so much concern about the silver-to-gold ratio?

David Morgan: I think that too much emphasis is put on the ratio. It's a metric that many follow to value the Silver Price relative to gold. It's useful in trading between the two metals, which I have taken advantage of a few times during this bull market. It's something that can get overblown and no one knows what the correct ratio is.

When you get silver really moving and the euphoric panic part of the market engages, it tends to really move faster than gold because it's a smaller market and you have a lot of money moving into the market. That's where you see silver overtake gold on a percentage basis. So we could be 60-to-1, 50-to-1, 40-to-1 and stay 40-to-1 for a long time. Then when then market goes into this panic buying mode we could go from 40-to-1 to 20-to-1 and then 10-to-1, as an example. That whole process from a 40-to-1 ratio to a 20-to-1 ratio might take two to three months. Again, is there an exact perfect ratio for silver to gold? No there isn't. The ratio does suggest that silver is still undervalued relative to gold.

TGR: Do you have a timeline for when Silver Price gains may overtake gold?

David Morgan: I don't have, but I'll be consistent. I've been asked this before and the answer has been probably 2012-ish. If you look at some of the analysts' work, they put timelines at sometime between 2011 and 2016. Basically, if you forecast, you should put a price and no timeline or time and no price. That way you can't get cornered. Who wants that? That's no value to anybody. But a guess is a guess. I don't think you're going to see a really big move in the metals until 2012 or later. However, I do expect both gold and silver to make new nominal highs this year and silver to outperform gold by 30%.

TGR: You stated in your April newsletter that you believe gold and silver are oversold now. You're building cash as you expect a big selloff to be coming soon. What aggressive moves of a speculative nature are you making with some of that cash?

David Morgan: I was referring to the big selloff in the general equity or general stock market like the S&P 500 or the DJI, not the precious metals. As a result of that big selloff, I would expect that metals and mining equities would be taken down. The metals and mining shares are not poised to move down by themselves presently. They're actually moving sideways and they're in a high-consolidation pattern that may briefly intensify.

TGR: David, this has been great. We appreciate your insights.

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