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Buying a dip in gold or silver means you think the deeper uptrend remains…

BEST-KNOWN as "Mexico Mike" for his column in Investor’s Digest of Canada, Mike Kachanovsky is a consultant providing analysis of junior Gold Mining, silver and other mineral exploration stocks.

Founder of the website SmartInvestment.ca – which serves as an online community for the discussion of all topics relating to junior mining stocks – Mike Kachanovsky here talks to the Gold Report about why he thinks the market is now better than ever for precious metals, as well as the abating political risk for mining companies in countries such as Mexico, Colombia and Vietnam.

The Gold Report: Mike, in our last interview, you said you were optimistic about precious metals because government reaction to the financial crisis was to keep interest rates low and issue large amounts of currency. Are you still as optimistic about gold and silver?

Mike Kachanovsky: Absolutely. I’ve been probably more excited about the precious metals after the way things have unfolded in the last 12 months or so than I was even during our last interview. The same factors still apply in terms of having artificially low interest rates and quantitative easing, where many nations are debasing their currency and printing money. I believe that inflation is only just now starting to become a factor.

You’re starting to see that commodity prices across the board are increasing and it’s decoupling somewhat from the US Dollar. The US Dollar is showing a countercyclical strength in the last few months that’s largely a reaction to what’s going on in Europe. But the commodities are holding firm and in many cases are rising, nonetheless. I think it’s just a matter of time until the US Dollar rolls over again and may begin to lose value relative to other currencies. That’s when you’re going to see the real upside potential in the precious metals become a reality.

TGR: Do you think the decoupling is ultimately a good thing and how much time is involved for this turnaround that you’re forecasting?

Mike Kachanovsky: It’s always difficult to put a timeline on this sort of thing. There’s quite a number of moving parts and different factors that are having an impact. I mentioned the troubles going on in Europe. Some of the nations there are having fiscal difficulty in their own budgeting. You have a lot of feedback loops clouding the waters somewhat in terms of when all this is going to come to pass. I don’t necessarily like to put a timeline on it. In fact, if you’d asked me a year ago I would’ve thought we would be much higher now than where gold and silver are priced.

Is it a good thing that resources are decoupling from the Dollar? Yes and no. I think what you’re seeing is that investors are starting to put money into commodities as an alternative to traditional financial vehicles. People believe that commodities are going to hold value better than, for example, owning short-term treasury notes or owning Dollars themselves. And so, in that sense the fact that people are losing confidence in the more mainstream financial investments to me is a bad thing. It’s a sign that our economy is under duress and that people don’t feel that good about the future. However, if you happen to be an investor in commodities, of course it’s a good thing that you have strength.

TGR: What kind of portfolio adjustments are you making right now? Are you accumulating more stock, precious metals, cash?

Mike Kachanovsky: Well, I’ve always had a mentality of being a very aggressive investor and as such I buy the dips. My portfolio is almost entirely weighted towards resource stocks. That’s not just precious metals. I own oil and gas stocks. I have leveraged to rare earth elements, base metals and coal. I’m also looking at agricultural now as well. I think that’s a sector that’s going to outperform the overall broader market. When I see a pullback in the market, I use that as an opportunity to continue accumulating, buying the dips. I also buy physical bullion, gold and silver. I’ve never been a seller. I’ve always been a buyer.

I’ve owned silver since it was under $5.00 and I bought another bar just last month on the pullback then. I don’t really overreact to what’s going on, on a cycle to cycle basis. As long as I’m convinced that the fundamentals are still in place for a long-term secular bull market then I don’t try to trade it. I just look for the opportune times to continue to average up as the market progresses higher.

TGR: Are you saying we’re in a pullback now?

Mike Kachanovsky: It’s hard to say. Commodities are notoriously volatile. To me a pullback is more a cyclical type of description and I think we’re still in an uptrend. However, for gold, a $100 downside move over a period of two weeks is not uncommon. If you look, you could probably define this gold bull market as being about a 10-year long phenomenon so far. There’s probably dozens of occasions where you had similar type dips in the value of similar magnitude and percentage. Did it constitute a pullback? Well, not necessarily, because gold has been up every year.

TGR: When you’re talking about dips for the purpose of taking advantage of them, you’d like to see some sort of long-term trend more than just a few days right?

Mike Kachanovsky: That’s correct. I should emphasize that part of the strategy of playing the dips is you have to be willing to sell the spikes. My personal strategy and philosophy is to maintain a core position in the stocks that I think are the best stocks that an investor has to be positioned in. Then I also maintain a trading position. I’ll buy extra stock in some of these companies when they sell off. Then as they spike high, I’ll unload that trading position and capture that net profit.

TGR: What stocks are you favorable towards right now?

Mike Kachanovsky: I still think silver is going to be one of the best commodities to be leveraged to. Silver is a frustrating metal for anyone that’s been aware of it and following it. It doesn’t seem to rise as quickly as we expect or hope. I still think silver has the potential to be one of those metals that can go from $15.00 to $50 or to have that 200% to 400% potential gain in one year that we’ve seen from some other metals like uranium. I believe that’s sometime in the future for silver as well.

When I’m looking at specifics stocks to gain leverage to, I want to find companies that are developing silver deposits that are cash-flow positive, have a number of projects on the go and are aggressively acquiring other prospects in this market. Then they are better positioned for when silver lifts off. I also look at market valuations relative to the peer group. When I see a company that I think is above average in terms of its fundamental strength and it’s trading at a discount to its peers in any sector, I’m going to want to buy some of that company. I feel that it’s just a matter of time until the market recognizes that strength and prices it in.

TGR: Do you have a preference in terms of companies that are speculative in their focus and are hoping to sellout versus a long-term viable production company?

Mike Kachanovsky: I look at the market value of a company and decide. If I feel like I’m getting a discount of what the fair market premium should be, then I’m going to go after that company. Most of the time, the established producers are more conservative. A lot of the risk is out of the equation but their upside potential is also going to be less. I do not necessarily have a preference to more speculative stocks. I think it’s more accurate to say I have less fear of risk. I’m willing to take a gamble and try a position in a stock that has more risk if I believe it’s priced fairly and the upside risk is justified by the potential rewards that I’m going to gain by investing in those stocks.

TGR: Are you more likely to take those risks on a region like Mexico than you would anywhere else in the world right now?

Mike Kachanovsky: I think a lot of the places that investors consider risking today are maybe not as risky as they think. A few years ago I didn’t want to touch stocks from Brazil. I had this impression that Brazil was a very risky place to invest and I just didn’t want to go there. Instead you look at some companies that have been active in Brazil.

I think a lot of people still have this impression that Mexico is risky. Part of the reason is that the media focuses on what’s going on in certain border cities and there’s a lot of violence that’s over-reported. I think Mexico has its challenges like any other nation, but overall it’s a very stable country with a strong tradition of mining. There’s well-documented legal processes in advancing mining claims. It’s pro-mining, allowing foreign companies to come in and invest. You’re seeing a lot of companies now that have been in Mexico for a year or two or five that are producing fantastic earnings and drilling their operations.

Other places like China are very popular for investing. But I don’t see that same track record of strong performance for foreign companies that have been able to go in there and actually make money and build value for investors. So I don’t look at Mexico as a risky place to invest. There are other places that I think are risky and I’ll still go in there and look at them. If the value of those stocks is fairly discounted to that risk, I’ll still participate. In my opinion, Mexico is not a risky jurisdiction. It’s a great place to invest.

TGR: Do you think the investment "window" there is still wide open? Are there any new plays?

Mike Kachanovsky: I think it is still wide open. I think in a way this market meltdown and nasty correction that the entire precious metals mining sector went through over the last 18 months has been beneficial in some ways because it’s really helped to separate out a lot of the pretenders. There were a lot of companies that just staked a property and raised some money and I’m not necessarily convinced they were seriously into advancing to become stable, producing mining companies. Those companies have disappeared or gone bankrupt or moved on to other speculative sectors. So the companies that are still there and still focused are able to raise capital and develop projects and increase the scope of their activity.

It’s much clearer now to find who the winners are. Those companies continue to behave strongly and have that profile that I look for when I’m trying to pick from all the different companies that I think will be the best performers for the next few years ahead. Are there any new plays? I think just about every week you hear about another company that has established a position or bought up an old project or closed a transaction.

TGR: Thank you very much for a fantastic interview, Mike.

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Source:Buying the Dips in Gold & Silver

The collapse of shadow banking adds up to massive inflation, not least for Gold…

SINCE WE have little interest in joining the speculative party going on in the stock market at the moment – other than in the best precious metals and "disruptive technologies" stocks – the task of this Daily Reckoning is to prove why the coming collapse of the shadow banking system is not deflationary but inflationary and, among other things, bullish for Gold, writes Dan Denning in Melbourne, Australia.

If that’s not the sort of discussion that interests you, you might want to go take a powder or read a good book. These are murky waters we’re wading through. So we’ll do our best to clear them up for you, starting with the case against deflation.

All good debates begin with a proper definition of terms. Rather than defining deflation in our own way, we’ll leave it up to one of its most consistent and articulate (and accurate) advocates, Robert Prechter. He’s written about it for years, and in a recent video he says…

"The next big phase [in the cycle] is a credit implosion where people who are debtors are going to be scrambling for Dollars to pay off their debts and the creditors are going to be dunning the debtors to pay them back…The scramble will be for Dollars, not for things."

The investment outcome of Prechter’s scenario is bullish for the US Dollar and US Treasury bills. Because, he says, "the chances of default are low."

Prechter’s argument is based on the idea – which we happen to believe – that the US Federal Reserve is unable to prevent falling asset values. This would lead, by Prechter’s reckoning, to falling stock, commodity, and real estate values.

All of that seems right to us here at The Daily Reckoning so far. The deflationary argument depends on the collapse of both the shadow AND the real (deposit taking) banking system. The shadow banking system is the murky world of credit, securitization, and derivatives which currently supports and/or holds some $600 trillion in assets.

Yes that’s trillion with a "T".

Most of these are interest-rate and credit derivatives. As we learned in the last two years, the big risk here is to institutions which owe – and also which own – these obligations amongst one another. In our view, the degree of interconnectedness among these obligations (they still aren’t unwound) makes the entire global financial system vulnerable to a systemic shock and/or total collapse.

It nearly happened last time with Lehman and frankly not much has changed since. A good old interest rate spike that’s not in anyone’s model might be the sort of thing that precipitates the next crisis. After all, that’s the way these things generally begin.

Now, you could make the argument that it shouldn’t really matter to the real economy if a bunch of global institutions find out they can’t settle their obligations to one another. Why not just forget the whole mess and start other? After all, most of these derivatives are just insurance policies of some sort. Can’t we just cancel the policy?

Probably not. These positions are held in conjunction with myriad leveraged bets on the direction of other asset prices. They are hedges. No one is going to walk away from them. But more importantly, the connection between the shadow banking system and the real banking system is much more substantial than you might first imagine.

So much of today’s funding, financing, and lending is done by the shadow banking system through securitization and money markets and income and mortgage trusts. The real economy is tied to the shadow banking system in just the way that you are tied to your own shadow. And the real, deposit taking, depositor (taxpayer)-insured banking system is not much better off.

For example, my colleague Porter Stansberry reports that in the United States, some 7.1% of commercial real estate loans are more than 90 days overdue. The FDIC reckons that over 700 US regional and local banks are "danger" banks. The reason is that these banks own mostly commercial real estate. It’s their main asset. And unlike their money-centre big brothers on Wall Street, these banks aren’t going to be recapitalized or bailed out at taxpayer expense.

Students of the Great Depression will know that widespread bank failures led to a contraction in the money supply. Banks, more than the central bank, are the engine of money and credit growth in a fiat money system. Take away several hundred banks, and you get lenders not making loans. Money supply shrinks. Cash and Treasuries gain in value.

In fact, when you couple the wounded regional banks in the US, who are massively exposed to one dangerous asset class, with the potential collapse of the shadow banking system from another interest rate/liquidity/solvency shock, you begin to wonder how deflation is avoidable at all in the near future.

We have a labored three-part answer. We’re going to lay it on you now. It begins with the destruction of the shadow banking system. It accelerates with the paralysis of the regular banking system. And it concludes with deliberate devaluation of the currency via monetary and fiscal policy to make up for a completely destroyed credit system.

Granted, it probably sounds absurd that you can have a $600 trillion wipe-out in the shadow banking system and somehow get inflation. But there are two points to make here.

First, it’s hardly believable that an institutional panic and bank run in the shadow banking system (what happened last time) would actually boost confidence by individuals and consumers in the overall banking system.

True, it might increase people’s preference for liquidity and cash. Stocks, real estate, and bonds would fall. But another swift collapse in the shadow banking system would be a hammer blow to already fragile confidence in our financial system, including the value of paper money itself.

But a more technical response is that as the shadow banking system is unable to finance economic activity and speculation, either that activity goes away (a Greater Depression) or someone else tries to fill the gap. We’ll assume for the moment the regular banks won’t do it. That leaves the government.

And in fact, that is what you had in the US following the last crisis. You got an alphabet soup of Fed-backed programs to provide all sorts of credit…to students, to money markets, to car companies, to corporations. This list grows longer by the day. And what it means is that the only provider of credit in a post-shadow banking world is the public sector: the Fed and the Treasury.

Whether these are loan guarantees or outright loans or the purchase of securitized mortgages (Fannie and Freddie) it amounts to the same thing: a huge transfer and burden to the public sector balance sheet. Whether it’s monetization or guarantees that add to Federal liabilities, both are Dollar bearish. The transfer to the public sector then, results both in destruction of asset values and inflation in the currency.

But wait! You can’t have inflation if there’s no one to make loans and use the money multiplier to turn growth in the monetary base into new Federal Reserve Notes. That is, if the shadow banking system collapses, won’t this lead to the same no-risk paralysis with the big banks that has led to their holding trillions of Dollars in excess reserves with Central Banks?

Why yes, it will. But this also argues for inflation. Here we’re going out on a limb. But what we’re arguing is that as the private sector is less able or willing to dole out credit into the economy, we’re entering a world where the government is going to bypass the middleman and do the job itself.

This happens in three ways. First, the government can buy securitized assets to fund non-bank lenders. The AOFM does this in Australia to support housing prices and non-bank lending to first home buyers. It’s done in the State at a much more comprehensive level. In effect, the entire American mortgage market has been nationalized with the government guaranteeing and buying trillions in mortgages.

This is the future. More nationalization of key lending institutions. If the private sector won’t do it, the Feds will. But at great cost. Each new loan guarantee weakens the public balance sheet and the currency. Thus the retreat of the banks from credit creation hastens the day where fiscal and monetary policy are forced to be more transparently absurd and redistributive.

The second way in which the government becomes a lender is through extended unemployment benefits. The dole. In some States, it’s possible to receive 99 weeks of unemployment benefits. This doesn’t mean dole bludging has become a full time job. But because the structural changes to Western labor markets wreaked by globalization are wage deflationary, then to us (at least) this means a larger regular expenditure on the unemployed. The US is headed the way of Europe, with higher structural unemployment. Whether it can afford to pay for this while fighting two wars, spending a $1 trillion expanding health care coverage, and preparing for an increase in entitlement payments…well, you do the math.

The net result of the increased burden on the public sector in supporting private incomes is a weaker currency. It always comes back to that. And it’s true for the Euro, the Yen, and the Dollar. It’s true, in fact, for all paper money. This is why we believe the end of the super cycle in paper money is bullish for precious metals (not deflationary).

The third way in which the government bypasses the traditional banking sector to get money into the hot little hands of consumers has already been suggested by Ben Bernanke: via helicopter. And this really is the greatest argument against the deflationary theory.

In one sense, Bernanke was right. The Fed can create an infinite amount of digital Dollars. It can expand its balance sheet infinitely too. It can buy assets directly. It can buy gold mines. It can probably create a market that securitizes future consumer wages and pays you now for them. You literally mortgage your wage-earning future (or perhaps you get an early pay out on your social security).

The only real restrictions on the Fed’s ability to create money are rising bond yields (market discipline on currency mismanagement) and political interference. On the first issue, the Fed has some covering fire. Global investors have to own something. And right now they prefer the Dollar. Unless the Fed does something radical and reckless, it can expand its role in providing credit directly to the real economy without doing huge damage to the Dollar…mostly because there are so few other good options.

Obviously we think gold is a good option. But for nations like China with trillions locked up in Dollar-denominated assets, what options are there?

You could argue that the US Congress and the President would not allow the wilful debasement of the currency via an expanded Fed role in direct lending. But we think just the opposite. Those ass-clowns will be begging for it.

When commercial real estate blows up regional banks, we predict you’ll see the President declare victory in Iraq and Afghanistan within months, bring the boys home, and cut defence spending by 30%. The money will pour into new lending and "jobs" programs to support the economy. Fiscal and monetary policy will work hand in glove to pump funny government money directly into the consumer economy. The only result there can be is hyperinflation.

So, it’s possible – likely even – that you’re going to see across the board falls in stocks, real estate, bonds, and commodities….AND inflation. Whether we got the proper sequence right, we’re not sure. But the combination of a shattered shadow banking system, a paralyzed banking system, and a terrified government certainly do add up to massive inflation.

Ready to Buy  Gold…?

Source:The Case Against Deflation

Why I'm Buying Back into Gold Stocks Now istockAnalyst.com (press release) And so did the price of gold coins. Coin prices have fallen maybe 20% since then. The precious-metals stocks we sold – Silver Standard and Seabridge – have … and more »

Source:Why I'm Buying Back into Gold Stocks Now – istockAnalyst.com (press release)

Is Washington's tax exemption on bullion a gold mine? Seattle Times The break applies to gold, silver and other precious metals sold as coins or bars, such as Krugerrands or vintage silver dollars. By not taxing those items, … and more »

Source:Is Washington's tax exemption on bullion a gold mine? – Seattle Times

How to defend yourself against a crisis in the value of money worldwide…

A PRECIOUS METALS aficionado armed with degrees in finance and economics as well as engineering, David Morgan created (and recently revamped) the Silver-Investor.com website and originated The Morgan Report, a monthly newsletter that covers – very broadly speaking – money, mining and metals.

A dynamic, much-in-demand speaker all over the globe, published in the Herald Tribune, Futures Magazine, Barron’s and the Wall Street Journal amongst other, he considers himself a big-picture macroeconomist whose main job is education – including helping people understand money, the benefits of a sound financial system, and the importance of research and patience in investments.

Here David Morgan speaks to the Gold Report that "There’s no asset better than gold if you’re worried about a crisis hedge…"

The Gold Report: Your investment strategy has long involved finding undervalued or overlooked opportunities. What metals does that umbrella cover these days?

David Morgan: The byline of The Morgan Report is "Money, Metals and Mining" and I approach the market in that fashion and in that order. Mining – that’s where you get the greatest leverage. And metals – are the best asset class, particularly the precious metals, during these uncertain times. From the metals-only perspective, I’m a top-down analyst. We determine supply-demand fundamentals, what would cause a price to be higher or lower or stagnant. With the precious metals, we look at some timing cues as well. And then we look for resource opportunities, not just in the precious metals or base metals, but throughout the sector, and we do a fair amount of work in the REE, the rare earth elements side. But overall we look for undervalued situations.

TGR: What looks undervalued these days?

David Morgan: Nickel is probably one that’s pretty undervalued, although it looks to be breaking out now. If you study the London Metals Exchange (LME), you’ll find pretty good inventory buildup in some of the base metals at this time – high enough to cause some concern on a short- or intermediate-term basis. Unlike wheat, corn, oats, cocoa or sugar, metals don’t deteriorate. From an economic point of view, if you can buy any of the metals under or near the cost of production and store them, you’ll make money in the long run. You might have to wait longer than you think because markets "can be irrational longer than you can stay solvent." But all that aside, I do see opportunities. If you want me to pick one, I’ll pick nickel.

TGR: All the metals or nickel?

David Morgan: All the metals should go higher relative to the US Dollar, but I think 2010 will be very back-and-forth. Stress levels are high on both sides – the inflationary pressures for governments trying to print their way out of this mess and the deflationary side of the equation because so many countries are on the edge of default.

TGR: What key economic factors are you watching to decide which side of the fence you’ll go to?

David Morgan: The velocity of money. Enough money has been printed to have a hyperinflation in milliseconds, so obviously it’s not a function of the size of the money supply. It’s a function of the velocity of money or how quickly some of it – we don’t know how much – starts moving out of a currency. We’ve already seen it, with India moving into 200 tons of gold, for example. That’s very small relative to the amount of debt out there, but still it’s a very strong signal to the markets about the fact that India values gold over US Dollars at this time, and believe me, they are not the only nation that thinks this way.

We could come to a situation of the straw that breaks the camel’s back, some subtle tipping point that the market may not recognize initially. When the Creditanstalt bank went bankrupt, nobody said, "Oh, my goodness, that’s going to take us down and cause a global depression." Yet most of us who study such things can point to that as a contributing factor to the Great Depression in the ’30s.

You have to think of it in broader terms than inflation or deflation: are we in the grips of a currency crisis? That’s when you don’t trust the underlying currency. Judging from what we see in the mainstream press, it’s pretty evident that other nations are questioning their trust of the US Dollar.

In economic situations such as this, history shows that there’s a price to be paid by everyone. It’s an issue of productive capacity. True wealth isn’t money. Real money is a store of value component. To produce wealth, you have to produce something of value to the marketplace. The productive capacity of the United States has been in decline since 1974. The productive capacity of China has increased substantially from that timeframe to the present day. Today the problem is that the means of exchange is not trusted (longer term) on part of the producer – China in this example. That portends some very serious issues ahead.

TGR: Going back to the undervalued or overlooked resources, in this environment where we don’t know whether to expect inflation or deflation, what sorts of investment opportunities are presenting themselves?

David Morgan: As far as I’m concerned, there’s none better than gold if you’re worried about a crisis hedge however it unravels eventually, either total deflation – a debt-liquidating depression or a hyperinflationary blow-off. Silver has done best in periods of high inflation.

People really get hung up on the inflation-deflation debate, but let’s face it, in both cases there are so many similarities. High unemployment, declining productive capacity, distrust of government, more government interference, general malaise throughout the economy – a great deal of uncertainty.

I would ask anyone who’s worried about this debate to put a silver coin or a gold coin in their right hand and their currency of choice in the left hand and ask themselves, which one has retained purchasing power over time? If you’re going to have savings, do you want the kind that has stood the test of time for thousands of years? Or the type of savings that has always failed throughout recorded history? If you’re not sure, divide it in half. Keep 50% of your savings in your currency of choice and the other 50% in the precious metals.

TGR: If people have cash ready to invest in equities or precious metals, would you say put all of your cash into precious metals now, and then liquidate as you want to invest in various equities? Or keep cash on hand just for equity opportunities?

David Morgan: You can buy the precious metals themselves at almost any time. That’s a different asset class than the mining equities. The mining equities generally follow the stock market to a certain point. Then comes a point – which we haven’t reached yet – when the mining equities start to take on a life of their own. In other words, you’ll see Gold Mining and silver equities generally going opposite the general stock market. At this time I think mining equities will follow the stock market down. A week or so ago I posted an article on my website about Harry Dent seeing the stock market debacle starting at the end of February. I would not be real quick to jump into the mining equities right now. But if you’re not invested in the physical metal itself, I would definitely buy some. I prefer a Dollar-cost-averaging approach to accumulating the precious metals.

And as far as selling the metal to buy equities goes, I would never do that. I’d do the opposite. If I have a big gain on a mining equity – say I made a three, four, five, 10-bagger – I usually turn that in precious metals. I’d rather turn paper into gold than gold into paper.

TGR: You were talking about currency of choice and in this case, gold. A lot of people now making a Gold Investment expect that at some point silver will stop trading as an industrial metal and start trading as a precious metal. A lot of people use the gold-silver ratio as an indicator of how rapidly silver can move up. Do you believe in that ratio and what it portends for silver?

David Morgan: There is a lot made of the silver-gold ratio. Silver probably will reach what I call the classic, or the monetary ratio, which is 16:1. It could even get down to the natural ratio, which at this time is about 10:1, but I don’t see it getting to any better ratio than that. Of course, this implies that silver is undervalued relative to gold.

When will silver take on this monetary aspect alone? That’s part of what I’m writing for the March issue of The Morgan Report. It’s basically looking at the silver market over the next 10 years. We have a 10-year bull market behind us and in my view we have several more years to go.

What happens is at the end of these great bull markets is you get into the euphoric or manic stage and this happens in almost all markets. You’ve seen it in the technology sector, when people were buying dot-com stocks that had no business plan and no equity, just an idea.

TGR: It was the new economy.

David Morgan: Yes. So that will take place. I think we’ll see the biggest run up of all time in gold and silver, especially the equities, a euphoric state of panic buying driven by fear and greed. I’ll probably face a lynch mob me when I say "sell," because no one will want to trade physical metal for paper currency and I don’t blame them. Anticipating this, I’ve already planned some techniques to use to preserve our physical metal and still allow us to sell to a strong market, but those are days ahead.

When the panic hits, gold probably will go up to $2,000 and beyond – the average person will wake up thinking, "Oh, I’ve got to get gold equities; I listened to my friends and I thought they were idiots and now I see the light." Many will turn to silver because it’ll still affordable relative to gold.

Significant money will move in to the metals. And because silver is cheaper than gold, a lot of it will go silver, which will cause the ratio to spike relative to gold. You’ll see the ratio drop from 60:1 to 50:1 to 40:1 to 35:1 to 20:1, maybe to 16:1 or 10:1 because there’ll be more money, relatively speaking, moving into silver than in the past. And since silver is such a small market, any small increase in buying power will send the price far higher.

TGR: The way you explain this, these ratios are really only short term.

David Morgan: It depends on where you start the line. One of my earliest lectures, which I still do from time to time, is about the gold-silver ratio. If you go from the 12th century, it’s a 12:1 ratio, which was exactly the natural ratio at that time. In other words, 12 ounces of silver in the ground for every ounce of gold, and that’s basically how it was mined up to about the 17th century.

So the market figured out that 12:1 ratio, and it held up for centuries. We got to the monetary ratio when England was having a problem similar to what the world economy is having today, and during the turmoil of a currency crisis Sir Isaac Newton told the Bank of England to go on a gold standard and they did. He said the correct silver to gold ratio in the new monetary regime was 15.5:1 – where the market was at that point. This ratio, roughly 16:1, remained static for hundreds of years.

So does it matter? Yes and no. Once silver was demonetized and deemed an industrial metal, there was no longer a tie to silver as money per se and so it was revalued. The important point is if silver is undervalued or not and if you think it is then obviously it represents opportunity.

TGR: The interesting thing when you bring up the histories of ratios is that silver gets consumed and gold doesn’t. It’s back to the silver as an industrial metal. Silver is also the by-product of mining for other base metals. You’re projecting the economies are not growing over the short term. If silver is a by-product of base metals, should silver production decrease and would that have an impact on silver prices?

David Morgan: Yes, it should decrease and it could affect prices short term. The industrial demand on silver was roughly 35% of the total market in 2000. In 2010, industrial demand now is 54% of the market. The industrial demand for silver is not only the largest demand, but it’s the fastest-growing. But that’s really not totally true because since 2006 you’ve had a huge increase of commercial buying of silver because its investment demand has increased extremely quickly. Since the advent of the SLV, the silver ETF, and other silver ETFs, there’s been a huge amount of money, relatively speaking, moving into the silver market as investment!

So you’ve got the industrial side. Regardless of mining activity being up or down, industrial demand is always off-taking silver and a lot of that off-take never comes back into the market. Recycling is significant, but it’s not total. In some cases, it gets used and it’s gone.

So that is an underlying eating away at the above-ground stockpile. When you throw an increased investment demand on top of that, especially in a small market, you can see an explosive situation approaching. Everybody wants to know when it will take place. I’ve said that the earliest it would take off in that manner is probably 2012 and I may be wrong. Markets do what markets do, but such explosive moves go in phases and we’re still somewhat in the skeptical phase.

For example, some of the people who bought gold above $1,000 are skeptical right now. They’re not sure it’s going to go to $1,200 ever again. I believe it will go far higher, but the longer it wallows between $1,200 and $1,000, the more likely these people are to listen to their friends, neighbors and brokers and say, "Gee, you know, gold isn’t a good investment. I’ve held it for a year and it’s gone nowhere. Put me back in the Dow or something." Even worse, if we do break the Dollar1,000 level, which I doubt but it could happen, they’ll be very unsure and probably will sell back into the market, causing it to depress in price further for a short time.

TGR: How do you see nickel, which you brought up early on, play out in scenarios you’ve been talking about?

David Morgan: I believe all commodities are in longer-term trend upward. If you dig into the archives, I made a good call in the early 2000s on the Financial Sense Newshour with Jim Puplava. I said the new era is here. We’re going from an era of having things we want to an era of having things that we need. Of course, we need food and shelter and raw materials. Those needs will continue. So do we need nickel in the future? You bet. It’s used primarily in stainless steel. If you’re going to build any food processing plant – and there are always more mouths to feed – you’ll use a great deal of stainless steel. And that’s not the only application.

You can play nickel, other metals or any commodity or stock short term if you wish, but I like to take the major trend and stick with it because that’s where you could make substantial money. Certainly some traders can do extremely well. But really successful traders are very rare and most people don’t have nearly enough discipline, because you have to be willing to take loss after loss after loss after loss. Even if they are small losses, psychologically that’s very difficult. Most people are not suited for it. They can’t handle the stress that comes with a trading strategy.

TGR: Some people suggest the equities because there’s substantially more leverage, thus more upside than with the metals themselves. What’s your feeling about equities?

David Morgan: We put out something in the rare earth elements (REE) area recently and it’s a speculation, so it falls in the class of fun money or money you can afford to lose. It’s a very hot sector right now. I believe it’s fairly safe to invest in, as safe as you can be in a speculation. But overall, right now I think it’s a good time to build cash. The next couple of months bear watching. I like the old adage: when in doubt, stay out. There’s nothing wrong with staying out of this market right now and if the market tells us something we have techniques for getting in quickly.

TGR: But when you buy, you like the undervalued stocks.

David Morgan: We always like to buy bargains. I like to invest for value. If I find something worth $10 and can buy it on sale for $5, that’s when I’m more interested in making the purchase. My timing is more of an intermediate-term basis. I cannot day trade; it just doesn’t interest me. But longer term, yes, timing can definitely help you, but you have to really know what you’re doing and no one can get it right all the time.

So for the average investor a Dollar-cost-averaging approach makes the most sense. Technical analysis is a very useful tool, but you can’t rely on it 100% and I’ll give you a quick example. There is no charting service or no human being that can make a 100% accurate case because you can’t chart, for example, where a 9/11 event is going to take place. My approach is to hold about 75% of the total precious metals stocks through thick and thin. And the other 25% can be traded in and out of the market.

TGR: You suggested that you like to find $10 stocks that are on sale for $5. Do you have any companies that fit those criteria now that you’re watching?

David Morgan: Not at this time, at least not at that big a discount.

TGR: Very good. David, I really appreciate your time. Once again, you’ve been a wealth of knowledge and insight.

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Source:Gold, Silver & the Currency Crisis