Source: JT Long of The Gold Report
Manipulation and apathy can't keep silver prices down forever; there is too much demand and too much money sitting on the sidelines. In this interview with The Gold Report, Silver-Investor.com Editor David Morgan tells us why he is grateful for his balanced approach to investing and life.
The Gold Report: A recent GFMS/Thomson Reuters Silver Institute World Silver Survey shows that while the price of silver dropped 23.6% in the last year, there was actually an increase in demand, particularly from China and India. Why is the price so low when the fundamentals seem to point otherwise?
David Morgan: As the survey shows, there was a deficit of silver, which means fundamentally the price should be higher. But real prices are determined in the paper markets and the pressure there has been downward.
Additionally, the large physical silver holding companies have not purchased any quantities of bullion in quite some time. That begs the question of why these big, traditionally bullish entities aren't stepping in at these low silver prices.
The other question investors are asking is, "When is this going to turn around?" They get depressed and say, "I can't win because the manipulators always win. It's pointless to be in this market." That mindset has taken hold of a lot of people who were once very bullish in the silver market.
This is all proof that we're very close to the bottom, if not at the bottom. When sentiment is this low, people become fearful. As Jim Dines says, the cure for low prices is low prices. It won't go on forever, even though it may seem that way now.
TGR: What price are you using for silver when you evaluate companies? Do you pencil in what the fundamentals say the price should be or the psychologically beaten down price of the paper market?
DM: We go with the market, which right now is saying $17 an ounce ($17/oz). The market cannot be argued with; the price is what it is. Regardless how it got there, manipulation or not, it is what it is. We use the 90-day average price because it's a standard in most industries and tends to smooth out the fluctuations. We might not agree with what the market is saying, but that's immaterial to our analysis. Our analysis has to be based on what the market is showing.
TGR: Is there a tipping point where the silver price is so low that even non-silver bugs start to see it as an entry point and come into the market?
DM: There are plenty of people, including money managers, who understand that this is a great price. They are just waiting for the right moment to bite. It usually starts with someone nibbling at the market and starting to accumulate. Or, someone sells aggressively to test the market for the absolute low. The Rothschilds were notorious for this type of market test and probably the first to do so in a manner that the public became aware of such tactics. They sold something they wanted to buy to force the price down so they could start accumulating at the very bottom. Either way, there will come a point where savvy buyers will start accumulating again.
TGR: Is there a tipping point where the silver price is so low that companies can't afford to produce it?
DM: Yes and no. The reality is that there are actually very few pure silver operations. As much as 70% of the silver produced is an offtake of mining for base metals. These producers really don't give a hoot about the price of silver. As long as they're making money in copper, lead and zinc, they don't pay attention to the silver price. They will keep producing no matter how low the silver price goes.
Even primary silver producers are reluctant to turn off the lights temporarily when they are working at a loss. I figure the average all-in sustaining cost per ounce, including taxes, is $23/oz. That makes selling for $17/oz unsustainable. But in the long run, operating minimally at a loss for a few months actually makes more sense than halting production. There are many reasons. Customer and employee contracts would result in big fines if not fulfilled in some cases. Also, keeping the wheels turning is important because mines deteriorate rapidly. A lot of them have to be dewatered, monitored for structural integrity and generally maintained. It actually might cost more to shut down and restart later than run it at a loss for a year as an example.
TGR: Is high grading taking some of the edge off that loss? Is that going to have an effect a couple of years from now on the number of Indicated resources left when prices are higher?
DM: Any company that has the ability to high-grade right now is doing it to squeeze out any profit possible. Some companies are in a better position than others. When gold was $1,900/oz, some mined the lower-grade ore that cost them, for example, $1,600/oz all-in costs and took that profit, leaving the $1,100/oz or lower higher grade for a rainy day when margins are tight, such as what we are experiencing now.
The general trend, however, has been toward lower grade resources. We have a finite planet and the easy stuff is targeted first. It's true in oil, it's true in metals. The grades being mined now are grades that were not considered worth mining three decades ago. But there is very little high grade left, so companies go after whatever can be done profitably.
TGR: You are going to be speaking at the Cambridge House Silver Summit in Washington this month. What words of wisdom do you have that will help put things in perspective at a time when a lot of investors are feeling stressed?
DM: First, people need to keep in mind that prices go up and down in all markets. Second, know that the fundamentals of owning precious metals have not changed. Third, remember why they bought the metal in the first place. And lastly, ensure that they are diversified properly, meaning they need to own the right amount of physical metal for their age and objectives. We don't advocate 100% or even 80% allocation to precious metals. But we want the money investors to put into the sector to be profitable, and that is why we specialize in sharing information about this sector.
A couple of years ago when silver prices had similarly dropped before bouncing up again, I talked at the Silver Summit about being grateful that I even have a portfolio to worry about. I shared some statistics on how the average American lives compared to the average citizen of the world. It was a reminder to myself and the audience that sometimes we get too focused on the monetary aspects of our lives.
Money is important, but it needs to be put in the proper place. There is more to life than how much money you can make. Nature preaches balance and when things get out of balance, it has a way of bringing them back into equilibrium. This is most evident in the natural resource sector. We're acting as if the earth is income rather than capital. The result is that we are using up our base capital in the form of forests and water and metal and not replacing them. That is unsustainable. I'm afraid we are going to pay a high price for that. We need to live within our means rather than getting all we can. It's more about what you can contribute, maintain and sustain than who has the most toys.
TGR: Thank you for sharing that.
David Morgan (www.Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of "Get the Skinny on Silver Investing" and a featured speaker at investment conferences in North America, Europe and Asia.
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