The past year has been a remarkably interesting time for precious metals and especially for silver. The metal had spent many years in the shadow of its “big brother”, but it made an impressive, roaring comeback that grabbed headlines and mainstream interest.
As can be expected, this attracted a lot of new investors to silver and many first-time buyers. For those of us who understand the importance of physical precious metals this was a positive development, however, we also think it is essential for all investors to know what and why their buying. To get a clear picture on the status and the outlook of the silver market, I turned to David Morgan. His long and direct experience and his insights are incredibly rare and valuable, while he also has a very deep understanding of the monetary and financial system.
David Morgan is a macroeconomist and widely recognized analyst in the precious metals industry. He is the publisher of The Morgan Report, a financial newsletter designed to help you build and secure wealth. He is the author of three books, and a featured speaker at investment conferences all over the world, and an ambassador for LodePay bringing digital silver and gold to the world.
Claudio Grass (CG): After years of being overshadowed by gold in the eyes of mainstream investors, silver recently made headlines with its considerable price surge, and getting caught up in the Wall Street Bets frenzy. What were your thoughts at the time? Were you concerned about the bubble scenario?
David Morgan (DM): We have seen more participation in the silver market. The main thing that’s lacking in the silver industry, and to some extent gold too, is education. If people really knew how important silver is to their lives and realized that it is currently the best investment opportunity, there would be a lot more participation in the silver market.
When I saw the Wall Street Bets people come to the fore, and start talking about silver, it delighted me because I knew immediately that it was a younger generation and that the word would spread rapidly. It brought a great deal of joy to me, seeing there are a lot more people willing to invest in silver, recognizing it as a great opportunity.
As to whether I’m concerned about a bubble scenario… Not really. I think that we could get overextended. It is possible. But silver is far from a bubble. We will not have a bubble in silver and gold until they become very mainstream. When Time Magazine has gold on its cover, or when we see silver talked about every day in the mainstream financial press, that would indicate a bubble.
CG: Over the last few weeks, the rally has stalled, and silver is holding steady. How do you explain this pause and what do you expect to see next?
DM: It is all about how the market works. The silver market is based on derivatives. The entire silver market, or gold or any commodity for that matter, is based on paper contracts. And paper contracts can be made to suit the issuers to any amount required. There is an endless supply of silver derivatives. When the physical demand came into the silver market, it was met by the ability of the commercial interest to issue receipts for that silver. Whether that silver was independently free, or pledged, or swapped, or loaned, is not known. In other words, the paper pushers were able to make good on “silver contracts” that were able to keep the price in check.
What I expect to see next is more education about the mechanics of the futures markets and silver, and for more and more people to realize that real silver is far different from paper silver contracts. This would make people that have unallocated silver make the switch to allocated or take physical delivery. That is a shift we’re already beginning to see and that is the vulnerability of the system.
When people take physical silver from a paper contract and turn it into something that is a derivative of something that’s real, there’s not enough silver to fill all the obligations that have been put on paper. As that fact becomes more and more well-known, I expect to see further pressure in the silver market, and further pressure on the silver price.
CG: Apart from the investment appeal of silver, unlike gold, the metal also has extensive industrial demand. Could a price explosion translate into massive disruptions for industry users?
DM: That is a difficult one to answer. The silver market is the only market that had a cartel to work on the price of the physical market. It was called the “Silver Users Association”. There is not much information available about it anymore, but basically, as the name implies, it was a cartel of the big silver users, like Tiffany’s for jewelry, Dow and DuPont, and Kodak at the time for film, which really is not a player anymore. And their idea was to basically maintain a price level that made them the most profit. Most of the big users, if not all, receive their silver directly from the refineries. They hardly ever go to the COMEX. They get it from Heraeus, or one of the big refiners out of Hong Kong or out of the United States, or out of China, or wherever.
So, disruptions in the industrial silver market could happen, but it will be the last place they will happen. And, of course, if there is enough pressure for silver for coins and bars and investment purposes, the refiner’s going to sell the silver basically to whoever bids it the highest. For example, if the U.S. Mint came in and said, “Well, we do not care that X, Y, Z industry is buying your silver directly. We’ll pay 50 cents higher than they will per ounce”. Then, if the industry cannot get silver in a timely manner, they will come into the market. You could have a frenzy of people bidding silver higher and higher just to get it for investment purposes versus industrial purposes. I do not think this scenario is unlikely, but of course it remains to be seen.
CG: What is the situation currently with the bullion banks? Has anything changed over the last few months since JP Morgan basically built up such a huge position?
DM: Physical silver is held primarily by JP Morgan. They are the big custodian that has first rights on the silver as far as we can tell, but this is not known as a certainty. And then under them, are all the sub custodians, and authorized participants. But like the subprime mortgage fiasco that took down the financial system in 2008, you could trace back each mortgage to the originator if you wanted to. It is the same thing in the silver market. You could trace back each loan, each swap, each lease, back to the original owner of the silver. And if you did that, you would not likely find that JP Morgan has the highest amount of silver “owned.”
Obviously, now there is more pressure in the market, but there’s still enough capacity for the banks to cover whatever physical demand is required by their paper contracts right now. However, that seems to be changing as we are doing the interview.
CG: On a larger scale, given the extreme stimulus spending and monetary expansionism we saw over the last year, why do you think it is that so many mainstream investors and experts remain unconcerned about inflation risk? What is your own outlook?
DM: I think they are unconcerned about inflation risk because of the narrative. The mainstream financial press successfully promoted the idea that inflation is not a risk, no matter how much money we print. It is only the Austrian School that understands where this inflation scenario leads. But pretty much everything that is taught in economics and finance throughout the world is based on the Keynesian principles, that the government’s all powerful, and that the banking system knows exactly what to do, no matter what is going on in the economy. Obviously, these are false assumptions, and will be catastrophic.
All these great inflations end. The bigger the bubble, the worse the repercussions once it pops, and we are looking at the biggest bubble in all of recorded history. It’s global, and the amount of money being printed is accelerated exponentially. And you cannot print yourself wealthy. No country’s ever done it. It never will happen.
The Austrians will be proven correct in that you must pay a price for “free money.” In some way or another, all debts are paid, which means either they get partially paid off, and the creditor accepts the partial pay-off, or they are defaulted upon. And the last thing that the United States wants to do is default on its debt because it is considered to be a safe investment. Although that is an absolute lie.
The only way out for the U.S. to “make good” on the bond market is to inflate it away, so that you are given your interest payment, you are even getting your principle back, but the value of that paper becomes worth less, and less, and pushes toward total worthlessness. Once the psychology of the market gets to that point, then you are going to have a massive bond crash. And once that happens, it cannot be put back together. That is Humpty Dumpty falling off the wall. That is my outlook.
In the upcoming second part, we turn our attention to the extreme risks arising from the debt problem and the seeming “decoupling” of the stock markets from the real economy, while we also examine the impact of the younger generation of investors going forward.
This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland.
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Claudio Grass, Hünenberg See, Switzerland 2021
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