June 5, 2009

In most issues of The Morgan Report I answer questions from our subscribers, this week I looked back at some past issues and picked out a few that might be of interest to this readership as well.

Letter #1

Dear David,

Thank you very much for your hard work and excellent research. Your level approach to the metals has long been a beacon to follow. Thank you.

I am writing to inquire about your opinion of the coming need for companies to follow the FASB-157 accounting rules. There has been some speculation on Web forums (such as PrudentBear Chat) that there could be some fall out in the coming months as companies which have been calling derivatives and other "mark to model" assets cash and short-term cash on their balance sheets. What level of risk is there that the junior mining companies might be bitten by this bug-bear? I would imagine that any producing mines could simply point to their ounces in production as an offset to any suddenly weakened assets that come to light via FASB-157, but wonder what impact this might have on the junior sector as a whole. Kind regards, Chris

Comment: Thank you for the kind words. A lot of what makes my work so enjoyable is hearing from subscribers such as you. Soon after the initial fallout of the derivatives mess last fall, which several prominent resource sector writers such as Jim Sinclair and Greg McCoach (and I) have been railing against for some time, a number of the mining companies we follow were quick to assure shareholders that they did not have exposure to these financial time bombs.

You are correct to wonder if, as the new accounting rules take effect, this might be a cause for concern. My studied response is as follows: First, I don’t believe that our sector has seen the level of participation in these investment vehicles that has been taking place in, say, financial houses, pension plans, and banks. Second, there is a simple way to find out... go to their Web site and see if they mention their involvement, or lack thereof, in these derivatives. If they don’t have a statement, call the IR of the company in question and ask them point-blank. I think you will find them to be upfront about it. (And if they aren't, that tells you something too, doesn't it?)

Actually I am much less worried that the sector will be tarred with this brush than I am about the ability of many of these “blue sky” explorers to raise the cash they need to keep drilling. Money is going to be harder to come by, it will cost more to get it, and shareholders will expect to see tangible results for the expenditures. If a company is not looking to either start production by themselves, JV with a major on a project, or at least have some very good looking property to prove up over the next 12-18 months, they could be in real trouble.

Letter #2

Hi Dave,

A lot of talk around at the moment about a shortage in physical silver. If this is the case, wouldn’t there be a rush to take delivery of physical silver from the exchange to arbitrage the difference? Could the short supply just be a fabrication holdup?
                                                             – Cheers—name withheld upon request

Comment: I want to be as specific as possible here. I spoke with the main producer of the blanks for the U.S. government mint making the silver eagles. In the past,

250,000 blanks per week was sufficient for silver products. At this time the level of production has been increased to 400,000 per week, and the mint is behind on orders. One thing we can state for a fact, the fabrication is not keeping up with demand!

Secondly, very few 100-oz. bars have been made since the 1970s to early 1980s. Certainly some are being fabricated, but nothing like what was done in the previous bull market. Thus, until recently, the investor 100-oz. bars just kept changing hands. Now, however, these bars are in strong hands and new demand cannot be met. Markets strive for balance, and when a profit opportunity exists, markets normally find a way to exploit it. It make take some more time but if the current demand holds, look for new 100-oz. bars to be fabricated by someone to meet demand.

Letter #3

Dear Mr. Morgan, I have two points that I would be grateful for you to address, as they seem relevant to any silver investor at the moment: silver under performing gold (ratio back to 100?).

The last couple of months have seen a dramatic drop for silver much more than gold with the ration going from 50 to over 70. I believe this is a widely acknowledged fact that silver under performs gold in times of recession and some commentators (Bob Hoye for example) have been calling for a return to the silver-gold ratio to 100. The outlook for commodities is rather bleak at the moment and this seems to affect silver also. What is your view on the ratio returning to 100?

Comment: My view is silver is more volatile than gold and I doubt we will see the 80 to 1 ratio again, which is the ratio where the silver bull market began in 2003. If the ratio got back to 80 to 1 or higher then I would get concerned. Hoye was interviewed by me and he does not study the silver market the way I do. Historically he is correct for the most part, but history does not repeat exactly. Silver has every attribute that gold has, plus it is also required by Industry. When the U.S. dollar panic really gets going, people in Latin America and Asia will buy silver because they know it protects and preserves wealth. These buyers never have heard of and never will hear or care about Bob Hoye or David Morgan for that matter.

Further, after my interview with Hoye and his being so negative toward silver, I asked him if he knew that Mexico had introduced a bill to permit silver coinage to come back into the monetary system alongside the peso. Hoye knew nothing about it. My point is, question your basic premise and even question the “authorities” on any subject, yours truly included. If you know why you own silver in the first place, then either hold or add to your holdings.

It is an honor to be.

Sincerely,

David Morgan

Mr. Morgan has followed the silver market for more than thirty years. He wrote the book, Get the Skinny on Silver Investing. Much of his Web site, Silver-Investor.com, is devoted to education about the precious metals, it is both a free site and does have a members only section. To receive full access to The Morgan Report click the hyperlink.

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