Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelertoing Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Silver $75 Looming

Commodities / Gold and Silver 2011 Aug 09, 2011 - 03:12 AM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleThe new normal could be $75/oz. silver. In this exclusive interview with The Gold Report, David Morgan, editor of The Morgan Report, maps out a path for silver that could sink as low as $5/ounce (oz.) during the summer pullback and then bounce up to $75/oz. to establish a new base level. A consistent Silver Institute Production Cost Standard could help investors make smarter decisions during the coming upswing.

The Gold Report: In your Morgan Report, you have written extensively about the impact of global financial issues on gold and silver prices. At least temporary solutions have been found for the euro-Greek tragedy and the U.S. debt limit debacle. Will this give the U.S. dollar a boost at the expense of precious metals?

David Morgan: It is getting more difficult to predict what the market reaction will be to specific events. As people figure out that there really is no solution to the global financial system without a great deal of pain and some defaults along the road, more will seek the safety of precious metals. So, even when things calm down for the moment, it does not mean the precious metals will not get pushed down. You could see gold and silver react to the downside, perhaps dramatically—$5/ounce (oz.) silver is not entirely out of the realm of possibility. My best guess is we will see some pullback going into mid-August.

TGR: Today, gold hit $1,700/oz. during what is normally a summer slow season. Can this climb continue? What are the drivers?

DM: Yes, it can continue and the driver is uncertainty. Look at all the problems in the currency markets. It seems interbank lending is starting to freeze up in Europe. This was one of the main factors contributing to the financial crisis of 2008. So there is much to consider and it boils down to the fact we are in the final stages of a currency depreciation on a global basis.

TGR: A lot of the economic indicators—GDP and consumer confidence, in particular—are coming in weaker than expected, not to mention the Standard and Poor's downgrade of U.S. debt. Could we see another 2008-style sell-off, and how would that impact precious metals?

DM: Fundamentally, nothing of substance has changed since 2007 except that the banks have lots of money on hand. You have to understand that the silver market has a mind of its own. What happened in 2008 was a silver sell-off that caused a shortage, pushing the physical price of silver at the retail level to around $13/oz. while paper silver traded under $9/oz. on the futures exchanges. Excessive short selling then ran the price from about the $20/oz. level to the brink of $50/oz. The next leg up could take out the $50/oz. level after a few tries and then not look back until establishing a new nominal level of $65/oz.–$75/oz.

TGR: Where is the demand for silver coming from? Is it industrial or investment-driven? Is the developed or developing world pushing the market?

DM: Look East. In July, the Hong Kong Mercantile Exchange launched a U.S. dollar-denominated silver futures contract. It cited "surging international demand for silver" as the cause for the launch, pointing out that silver demand rose 67% domestically between 2008 and 2010. China accounted for almost 23% of the world's silver usage last year. It is now using four times as much silver per-person as it did 12 years ago, but this is still one-fifth the amount used on a per-person basis in the U.S. and Canada. Silver demand is growing for both industry and as an investment.

The game has changed, however. The physical market is gaining control day-to-day and the bankers are finding it more difficult to persuade the market in their favor. This will only add to the volatility.

TGR: How will the new Silver Institute standard help investors assess production cost accounting and make smarter investment decisions?

DM: The silver version of the Gold Institute Revised Production Cost Standard is an attempt to create an apples-to-apples yardstick for silver production across the sector. In the past, companies used different metrics to arrive at cost/oz. estimates. Some excluded royalties, while others ignored shipping refining costs. A significant benefit of the new cost standard is that it helps clarify the use of silver equivalent/gold equivalent ounces jargon. About 70% of silver extraction comes as a result of base metals production. But what happens when a company with very little silver on its property decides to report its silver equivalent ounces? Theoretically, the property could be devoid of silver and still use this term by assigning a "silver value" to its base metals. The silver standard should eliminate that practice.

The standard is a general accounting system. So, by definition, it will not fully address all circumstances that producers in the sector might face. For example, a "pure" silver producer with relatively low base metals production in relation to silver ounces will not be able to post a significant base metals figure under the "byproduct credits" entry. And given that the refinement cost of base metals can be substantially higher (up to 40%) than for silver ore, this disparity could work against a given producer when "Total Production Costs" are tallied. Other disparities that might arise can happen when looking at "payable versus produced" ounces, taxation/shipping costs on the export of doré versus silver concentrate, etc.

The standards are also voluntary. Time will only tell how consistently this reporting process will be followed. It was widely embraced on the gold side. Early indications should be evident this fall, when silver producers begin filing their third-quarter financial statements. However, if investors feel it helps them clarify how much profit a silver producer actually makes from its operations, then it is likely to become a de facto yardstick in such matters.

One word of caution. This, or any measurement tool, should never be thought of as a yardstick that will lead to an investment go/no-go decision. Even assuming that this metric gave a totally accurate picture of a company's silver production costs, it would be unwise to "pull the trigger" just because Company A showed a lower production cost than Company B. What if your lowest cost-of-production company gets nationalized? How about the effects of a major mineshaft collapse on production? I'm just saying that the path to high-probability investment decisions depends on a multiplicity of factors, assigning subjective weighting to each, and then accepting a certain level of risk to compensate for unknowns, no matter how the numbers stack up. Therefore, the more factors that jibe, the more likely one is to have arrived at a "profitable" trading consideration.

TGR: Can you give us an example of how to look at a company's reporting?

DM: In 2010, First Majestic Silver Corp. (TSX:FR; NYSE:AG; Fkft:FMV) was the top-performing silver company partially as a result of reporting total production at 93% pure silver. This also made the company the purest silver producer in the world (so far in 2011 the percentage is 97%). Due to the high silver purity, mining costs are less likely to be artificially skewed and reflect the costs associated with a true low-cost producer.

Some silver producers record net revenue in the sales figure, which is net of smelter and transportation fees. The net figure includes sales of both silver and byproducts, and is stated in revenue per ton and costs per ton—a methodology that makes sense because most silver production is a byproduct of base metals retrieval. In this case, if the smelting charges are, say, 40% of the credit value, and are recorded separately, then it would give the appearance that the credits were providing a higher net value than was actually the case. Continuing with this scenario, it would be best to disclose the non-silver production as a credit, rather than as silver equivalent.

TGR: What is another way investors can have exposure to a variety of precious metals?

DM: Royal Gold, Inc. (TSX:RGL; NASDAQ:RGLD) is a leading precious metals royalty company that owns and manages royalties primarily on precious metals mines with a focus on gold. The company's royalty portfolio provides investors with a unique opportunity to capture value in the precious metals sector without incurring many of the costs and risks associated with mine operations. Royal Gold is an ideal investment vehicle for exposure to gold and other minerals, absent most of the inherent mining risk in your average gold miner.

Royal Gold offers leverage to the gold price, unlike many of the gold ETFs out there, while also providing a much higher dividend, relative to the industry average. It encompasses all the characteristics of a truly dynamic company, owning interests in 59 producing and development assets, geographic diversification, long-lived assets, fixed-cost structure and attractive valuation.

Like Franco-Nevada Corp. (TSX:FNV), Royal Gold has also embraced an aggressive acquisition strategy in the midst of unprecedented worldwide currency debasement. Royal Gold has near, intermediate and long-term production growth as well as longer-lived assets on its cornerstone projects based on current reserves.

Royal Gold has meaningful interests in some of the premier mineral deposits around the world with regard to gold, silver, copper and other base metals. Additionally, management believes in its products, which is more than can be said of the majority of operators, and it has proven so by way of spending more than a billion dollars in 2010 alone and is likely to continue as deals present themselves.

Royal Gold has also been on a buying streak. It purchased Teck Cominco, a diversified mining company and proven operator, that found itself in financial distress after the 2008 crash. Teck's Chilean Andacollo Mine is primarily a copper mine, but it possesses significant gold byproduct—approximately 55 thousand ounces (Koz.) annually for 20 years based on current reserves. This amounts to just over 41 Koz. annually payable to Royal Gold, more if the company can optimize milling operations and increase throughput. The present value of this royalty alone, using $1,550/oz. gold discounted at 8%, equates to nearly $60M, or $10.97 per share. Royal Gold also purchased International Royalty's (IRC) portfolio of 85 royalties on 79 properties. The present value of IRC's Pascua-Lama alone is nearly $600M, or $10.78 per share, using $1,550/oz. gold discounted at 8%. Completing the transformation, Royal Gold acquired its first streaming royalty in Mt. Milligan. This 25% streaming interest will become its largest single asset, contributing approximately 65 Koz. annually at an ongoing cost of $400/oz. Royal Gold has structured its cornerstone assets in mining-friendly countries, allowing investors to sleep easier at night. Using $1,550/oz. gold discounted at 8%, the present value is $799M, or $14.40 per share.

TGR: Those are great examples, David. Any final thoughts you would like to leave our readers?

DM: Yes, as economic times continue on a path of increasing stress it is a great time for people to reflect upon true wealth. The old adage that the best things in life are free is a bit naïve in my book. Nonetheless, people can reflect upon family, character, health, contribution and all the things that make us human. Perhaps you could do a thought experiment and ask, “What are the 10 things I value the most that do NOT involve money?”

TGR: Thank you for taking the time to share your ideas with our readers.

DM: Thank you.

David Morgan ( is a widely recognized analyst in the precious metals industry and 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, author of "Get the Skinny on Silver Investing" (Morgan James Publishing, 2009), and featured speaker at investment conferences in North America, Europe and Asia.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Franco-Nevada Corp. and Royal Gold Inc.
3) David Morgan: I personally and/or my family own shares of the following companies mentioned in this interview: Franco-Nevada, First Majestic, Royal Gold. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Streetwise - The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 282-5593
Fax: (707) 282-5592

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules