From the January 2002 Idaho Observer:

Silver: Short supply, high demand -- falling prices?

The following excerpts are from a Feb. 19, 2001 radio interview of silver market analyst and investor David Morgan by financial analyst and securities broker Jim Puplava. The entire interview and extensive documentation in support of Morgan's shocking claims can be found at www.silver-investor.com. Morgan has some very interesting theories as to how silver can be in such short supply/high demand and why its price as a commodity is lower now than it has ever been.

Jim: Joining me on the program is David Morgan. He has a BS in Engineering and a Masters in Business. David has been a private economist and precious metals analyst for over 20 years. He also adheres to the Austrian School of Economics. David has written numerous articles, many which are on the Gold Eagle website.

David, welcome to the program.

David: Thank you, Jim.

Jim: You know Dave, it's been a long time since we've seen a bull market in silver, nearly two decades. I wanted to start out our conversation and talk about the fundamentals of the silver market. Let's start out with the demand side for silver today.

David: OK Jim, that's a good place to start. As most analysts know, and a large part of the public as well, the demand for silver has exceeded the mine supply for over 10 years now, over a decade. On an average basis the shortfall has amounted to about 150 million ounces of silver per year. Over the past decade the demand for silver has been about 1 and 1/2 billion ounces above and beyond what we're capable of mining out of the earth.

Jim: And David, where is that demand coming from?

David: Well Jim, several areas. Silver's a very unique element. It reflects light better than any other element. It also is a very good conductor of electricity. In fact, it's the only element that, as it corrodes (silver does oxidize slightly), it still conducts nearly the same amount of current whereas other elements do not.

Silver is one of the best technology stocks you can buy because it is used not only in photography, but there are patents filed with the U.S. Patent office for a new use of silver on a weekly basis. There are more and more uses for silver all the time, and the public isn't aware of these. And some of them are small applications, but some of them are not so small. For instance, a lot of the cordless power tools that carpenters use these days are the result of improvements in batter technology made possible by the use of silver.

The applications of silver in our everyday lives are so numerous it would take the whole program to name them all.

But the applications for silver that are coming on board now, that I think have broad reaching implications, are the bacterial properties. Silver kills bacteria and it's a clean way to do it. What I am suggesting is that the properties that silver possess will be utilized more and more in the medical and in the health applications. I can foresee a day where communities will demand that their chlorine-based water treatment facilities be replaced by a non-toxic filtering system such as one that can be designed around silver.

The quality of life that we have today would not be the same without silver; the quality of life we could have tomorrow would be enhanced by silver.

Jim: All right, let's take a look at the other side of the equation, which is the supply side. We've been running deficits but a lot of the supply of silver that's been entering the market isn't coming from primary silver producers. What I mean by that, David, companies that are just purely silver companies, because a lot of silver comes as a by-product. Why don't you address that for a moment.

David: Yes, I certainly will. And you're of course, correct, and I'll try to elaborate.

The silver mining industry is almost at a standstill. But, of course there are some primary silver miners, but very few of them remain viable. For example Sunshine Mines, here very close to where I live, is under reorganization and I'm afraid it's going to fail. I remember when the stock was at $6, I remember when it was at $10. Right now it's at 9 cents. I just checked the price today. The primary silver producers are unable to make a profit at a $5 silver price. Now there are a few silver mines here and there and they are not in North America, where you can mine silver and probably squeak by at $5. The reason that the price is only hurting the silver primary mines is because, as you've said, most silver comes as a by-product. The by-product is from copper mining, zinc mining, lead mining and gold mining. Seventy percent of silver produced is a by-product of other mining activities. That silver is viewed by the miners as a slight bonus, and they take a credit. If they get X amount of silver out of the ground, and the primary resource is copper, and that is what they are in the business to mine, they will sell the silver right on the spot market for whatever it brings regardless of the price. Then they will take that money and apply it to the mining cost of the primary element that they are after, which is copper. That is one of the main factors I believe, that has helped to keep the price lower than I believe it's fundamental or its equilibrium price should be.

Jim: If we look at today's price that silver ran, 4.69, we've had a situation where we've had a supply deficit for well over a decade. Yet price continues to decline or remain the same in spite of this deficit. If we were to take that same situation and apply it to energy or platinum, or palladium or electricity, you would have exploding prices as we've seen in natural gas and oil. David, why haven't we seen that in silver?

David: That's the big question. That's the fundamental question that I've racked my brain over for quite a while, and finally have come to this conclusion:

I've just written an article on my website, Silver-Investor.com, called Silver in 2001. It's a two-part article that deals with what you've just said. The basic economic principles, are always in play, although there can be anomalies for short periods of time. You cannot have an asset of any class, be it corn, rice, or automobiles, I don't care what the commodity is, and have a decreasing supply and have the price go down. You cannot have a constant supply, and the demand increasing and the price go down. In the silver market you have a decreasing supply, and an increasing demand at the same time, and yet the price adjusted for inflation is probably at the lowest its been, ever. So that alone, if you're thinking at all, would tell you that something is not right in the silver market. And what I've learned is, the leasing activity that's been taking place in the bullion banks, has been able to supply silver from the above ground stockpile which stood at roughly at 2 billion ounces a decade ago, and that silver has been loaned or leased out to the users. And the users have taken the silver and used it for all kinds of applications that we discussed earlier. And that silver is gone. When these banks demand the silver back, there's not going to be silver to be given back to these bullion banks. And that's going to cause a huge explosion in the price.

Jim: Now, we've got this situation today. We've got diminishing supply, rising demand, prices remaining in a narrow range and yet you just don't see this in the commodities market. Oil, or corn, natural gas and other commodities increase and decrease in value according to supply and demand. You do not see that with silver. It's almost like someone is keeping the price of silver in such a narrow range that it does not generate any interest by investors. That would imply manipulation.

David: Yes, it does. I mean what I stated earlier, and what you're saying Jim is absolutely true. It can't be otherwise.

The situation has lasted for so long, because of the way that the future's market works...I'll try to make it simple, it's rather easy to understand. You'll hear all these talking heads on CNBC, and other market analysts that will give you these big explanations on why the market went up or down on a given day, or what the interest rate is going to do to the market overall.

A stock or commodity goes up because there's more buyers than sellers. A stock or commodity goes down because there are more sellers than buyers. So having said that, the implication would be that there's more sellers than buyers in the silver market.

Now that seems rather odd, because I just told you a while back, that we've got this huge demand that keeps increasing, and we've got a short fall that has to be made up by above ground supplies. But, if you study the facts, what you will find that there are huge short positions in the commodities market. The commodities market doesn't care for, awhile anyway, if it's real silver or paper silver. Most commodities contracts are never, ever taken delivery upon. In other words, 95 percent of all paper trades that take place in any commodity, corn, wheat, gold, silver, platinum, it doesn't matter. It could be anything in the financial market, T-Bonds, T-Bills, any of those markets, about 95 percent, they are just paper trades. These are speculators going against commercials, or just people in general going against larger entities, and either side is allowed to trade from either side, as you know.

And all of that stuff gets resolved at the end of a month, by a statement, or when they sell or buy with a statement that's a credit or a debit to their account, in whatever they're trading, and if you're trading in Japan it's going to be in yen, and if you're trading in the U.S. it's going to be in dollars. But what has happened if you look at the silver market on the commodities exchange, is you see a few years back you had 260 million ounces of silver, and today you see there's 95 million ounces of silver. So what that tells you is that there has been an off-take right off of the Comex in silver. This again goes to the basic core fundamentals that I keep preaching, and that is the overall silver market is getting very skinny as far as what actual physical silver remains. In fact it's so small, that if Warren Buffet decided to double his position, there wouldn't be enough silver on the Comex right now to fulfill that demand.

Jim: My next question is, what would happen if all a sudden, people who bought future's contracts for silver, demanded delivery. If enough people did that, there wouldn't be enough supply in the warehouses to make it a good faith delivery.

David: That's correct and that's why the regulators have been notified by silver analyst Ted Butler and myself, but they just ignore that basic fundamental fact. They just roll their eyes and say that they don't see the problem. I don't now how they can't see the problem.

Jim: Let's take a situation that can maybe exasperate this whole situation. We have an economy that is starting to decline, and we know that silver is a byproduct from things such as copper and zinc. So we could have a further reduction in supply.

We know that stockpiles in Comex are dwindling, and we have a U.S. dollar that is starting to decline and could go down further. What happens if those events take place and confidence is lost in paper assets, and people start putting money into hard assets?

David: The demand will exceed the supply to such a degree that you won't be able to put a paper price on silver. Mr. Butler, who's a very good analyst, has stated more than once and put it in writing that he feels that silver can go to $100 an ounce. I don't disagree with that, because the amount of silver that we know exists is 100 million ounces, roughly on the Comex. There is more, certainly there is, how much, I'm not sure, but the two best studies in the world puts it at about 300 million ounces. That's not much silver, we're talking about a billion and a half dollars and that sounds like a lot of money to you and me, Jim. And I'm sure to you and I it is.

But relative to the trillions and trillions of dollars in the world, just look at our balance of trade deficit. It's basically about a week's worth of trade balance.

I mean the Chinese could buy up all the silver in the world on a whim. It's absolutely a very, very, tiny market.

Another point I just have to make. There is less silver than gold in the market. That sounds really bizarre. I encourage any listener to go to my website to prove me wrong.

Right now, from all we can tell from the best studies on the silver market, there's roughly than 300 million ounces of silver available. And from the same GFMS and CPM studies, there's about 4 billion ounces of gold available. Right now we have less silver available to an investor, than we do gold, yet the price of silver is about 1/60th the price of gold.

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Editor's note: For space considerations we will end the excerpted interview with this curious marketplace anomaly. However, I would like to explain why this subject interests me so. David Morgan called and asked me what I knew about silver. My answer apparently displayed the same amount of ignorance on the subject of silver that is typical of Americans. We have been carefully conditioned over time to view it as a nearly valueless commodity that doubles as gold's ugly sister in the world of coins. As you can see from this interview, silver has tremendous value as a commodity and, as a metal for coins, is in shorter supply than gold. Though I am a layman when it comes to economics, it suddenly becomes apparent that some incalculably powerful forces have been keeping silver down. Since both history and contemporary events have proven that nothing in the realm of money systems and commodities trading happens by accident, we have little choice but to infer that “they” have something really big in mind for silver. It is my guess that silver will play a big role in the new economy that will replace the one within which we currently operate when it inevitably collapses.

For a thorough briefing on a more accurate understanding of silver, go to the website at www.silver-investor.com. Now might also be the time to take a look at silver-backed Liberty Currency (See ads pages 8 and 24).