Silver and China

Recently it was announced on a Chinese news service that silver bullion is now being offered to the Chinese public. Please note this is a very small operation and at this point none of us knows if this will really catch on with the Chinese investing public.

There are some subtleties going on in China that not too many people write about. China actually has a fairly long history with silver and I might suggest that readers check out the archive section at Silver-Investor.com and read what Charles Savoie has written on this subject. I know many of my colleagues are not as bullish on silver as I am, yet going back many years I recall reading an article in Barron's by John Doody.

I'm going to guess that article appeared about 15 years ago. Barron's interviewed John mostly about the gold market, but during the interview he got bullish on silver. He made this argument about the industrialization of China before it was really taking place, how vital silver is to an industrial society-same argument I make-that China had over a billion people, and this was going to be very bullish for the silver market. I thought, you know, "Touché, John, right on."

That's still the main argument about China and silver. Everything that uses electricity or electronics requires silver, almost. Think about it: your cell phone, your laptop, your CD player, plasma screen, refrigerator, washing machine . . . everything you can think of that uses electrical current or is an electronic item, like an iPod, uses silver to some level.

So even though it's a miniscule amount, if you've got a billion people seeking these type of gizmos, gadgets, and just raw power or something as basic as a washing machine, that puts an upward pressure on the silver price from an industrial perspective. But I think more importantly is that China is catching on to silver as an investment.

When I was in China, I met with Mining Bureau in Beijing, and also the banking sector responsible for mining finance, the bank, was concerned about a couple of things.

One, they were very concerned about recycling; in other words, they are very conservative. I think anybody who's thinking green would be astounded to know how China is so un-wasteful in some areas, though not all I grant you.

The Chinese are really conservative, but let's face the facts-when you have very little you waste very little. They don't want to waste anything, especially silver. The mining finance people expressed concern that there's lots of mom-and-pop recycling going on and they wanted to know my idea on how to consolidate this recycling.

China was really the last one to go off the silver standard. And it was not a good thing for them, relative to what was going on with the currency markets on a worldwide basis at the time. So there is a history in China with silver as money, and all those people who knew that are not dead yet. So there is some propensity to use silver as an investment, and here on the Silver-Investor Web site, I posted a news item about silver bullion investment opening up in China.

How much silver investment demand there will be and how it will catch on, nobody knows. I expect it to catch on. I believe that, as we get nearer to the ultimate top in the precious metals markets, silver will far out-perform gold. My belief, and this certainly can't be proven, is that people have almost a financial survival instinct, just like a basic survival instinct, and when things are really going south in a hurry, people will seek something, anything, that they perceive will preserve their wealth or protect them.

And both metals have done that throughout history. Now, if gold is going north of 1,000 or 2,000, pick a number; the idea is that you might not have that much to preserve, but whatever you've got you are highly motivated to preserve, and you're going to go to either the next best thing or the only thing that you can-and that of course is the silver market.

Now we saw a taste of that in 1980. Basically what was happening at the panic buying phase of the market where "everybody," or about 1 percent of the population, was trying to ditch the U.S. dollar. They were saying, "Get me anything but dollars . . . the dollar is history." And they were seeking silver and gold, and a lot of silver was purchased at the top because silver was more affordable to a lot of these people.

I see that taking place this time around, except this time it's not going to be 1 percent of the United States' population, it's going to be roughly 1 percent of the world's population. And on top of that, you've got to remember that at the time silver hit $50 in 1980, and there's roughly 1.6 billion ounces more fine silver available above ground than there is today.

So, we have a much smaller silver supply that's available for investment or industrial use or either, and we also have a much larger base of people willing to get into the silver market than there was before. I think that the $50 level is going to be breached in real terms. If we take the $50 price that silver achieved in 1980 and adjust for inflation, that's roughly $130 an ounce in today's dollars!

I have been on record as saying I see silver going over $100 an ounce in U.S. terms. Now I want to be very clear here: I'm very practical. For something to get to $100 it means it must get past $20 again and then it needs to get to $30 and $40 and $50 and on and on, so certainly I'm not trying to give any false hope or false indicators here. But I know these markets fairly well and when the U.S. dollar goes this time, the panic of 1980 will look like a warm-up event.

That is, in this euphoric phase of the market where everybody and his brother and mother and aunt and uncle are looking to get into precious metals, that's all you're going to see on the mainstream news. You're going to see silver and/or gold on the cover of TIME Magazine.

What you're going to see is a huge, huge move. But before we get there, we have to come off the base that we're building-this long consolidation, this wide trading range-and then after that we will get to the phase of the market psychologically, where there's optimism in the precious metals again.

During this phase you might see that gold goes from, let's say, a $1,000 barrier, breaks through that, and moves up nicely over several months to maybe $1,500, $2,000, $2,500, I don't know the number exactly. But I want to give you the correct idea.

Gold (silver too) builds this back-and-forth and back-and-forth upward trend over several months, and then after that's accomplished, you usually get some type of pullback and consolidation. But in most markets, shortly after that, the market will go into the euphoric state. This is where, as stated earlier, everyone wants out of the dollar and into precious metals. This is usually a very fast moving market with new highs being set day after day, and people simply cannot believe that the gold and silver prices are what they are!

It is an honor to be.

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.