Ellis Martin: Iím Ellis Martin, host of the Opportunity Show. Today again weíre featuring the Silver Guru himself, David Morgan. Mr. Morgan is recognized around the globe as an expert on silver, gold, and other precious metals. His Web site is silver-investor.com. David, thanks for joining us again today.
Last time we spoke we talked about setting up a possible new business in this economy and that would be a coin business, as opposed to a precious metals scrap business. You thought that this might be a good time to do something like that. But Iíd be afraid to get into a business that I didnít know anything about. Letís say I see this as a great business opportunity, do you just obtain a coin collection or make a deal with one of the mints? Do you acquire as much silver as you can and just hold onto it and sell it into the market as the prices rise? To do any business without any knowledge of whatís involved is risky, donít you think?
David Morgan: Absolutely, and youíre spot on. Itís not as easy as it sounds. The first answer is that a coin dealer or bullion dealer are, in essence, the business. Some coin dealers donít do a lot with rare coins although some coin dealers specialize in that area. Basically a coin/bullion business is a warehousing businessówhatever you have on your shelf that you sell you must replace immediately with no thought on the price. That sounds ridiculous, because you make a living by selling silver and gold, but the price that you makeóyour profitóis that dayís price plus your premium. What you have to do is offset that either on a daily basis and make sure that, whatever the market does going up or going down, you always get the same markup. In other words, if itís 4 percent retail markup to you the dealer, you want to ensure you receive that, regardless of what the spot price of the metal is at the time of sale.
This is important to know, because some people begin the business with the thought that you outlined, thinking, ďIíll just buy a bunch of metal and begin.Ē If you ended up buying your silver inventory at $14 and the price dropped to $10 and you had to sell it at the current price plus a markup, youíd be losing a lot of money. Therefore, people who start into the business need to have a clue on how to properly hedge. Some donít do it properly because theyíre too bullish and theyíre biased to the upside, and others are biased to the downside or whatever. If you actually do it right, you have a 1 for 1 correspondence. You have hedged exactly what you have in inventory. So thatís step 1.
Step 2 is the other question you implied: someone walks in off the street and has a coin collection to sell. Some shops just simply wonít do it and thatís obviously a business transaction and you say, ďThatís not our business; we deal in bullion coins only. We donít do anything in the rare coin market; youíre going to have to go somewhere else. Iíll recommend John down the street.Ē Thatís one way. If the coins are ďslabbed,Ē which means theyíve actually been graded by a professional numismatist who has given it a grade. That transaction is easy for almost any dealer, because the wholesale and retail prices are immediately available on the Internet.
So letís say a dealer is paying a thousand dollars for a slabbed one-ounce gold coin that the client brings in for possible sale. You say to the client, ďOkay, Iíll give you $850.00 for it,Ē and the client says, ďOh thatís pretty good; Iíve called on the phone and the best I could get from anybody else was $800.00.Ē So you pay him eight fifty and now you can hold it or, most likely, you would sell it into the dealer network for the thousand dollars and youíd pocket the difference yourself. Thatís the easy side. If theyíre not graded and they come in, thatís a little tougher because then you have to really know your coins.
Mr. Martin: Youíve got to have someone on staff who knows what theyíre doing if you donít. You have to be able to pay for that person, cover your overhead, and have the business from about week one to week four to be able to cover that overhead. Otherwise, thereís no margin for profit at the onset, is there?
Mr. Morgan: Thatís true. I mean itís a business that you can start fairly easily and you donít have to carry a lot of inventory. But it depends what happens. Letís say you just start shopping on the Internet, which would be very cheap to do, and by some stroke of luck your first order is for a million dollars. Well, you donít have a million dollars, right? So obviously itís going to be a bit tough for you, because what youíre going to have to do is lock in a price with somebody who trusts you at your word. Youíre brand new, though, so why would a wholesaler trust you at your word?
If you were lucky enough to get a wholesaler to lock in a price for you the dealer, then youíd have to get that check and make sure that it clears. If that check didnít clear, youíve really got a problem, because now you owe the wholesaler the million bucks you locked in. Letís say the price of silver has gone up substantially in the time it takes to find out there are non-sufficient funds on that check. . . . So you can see where Iím going with this. The big dealers are big for a reason. These are people who have been established a long time. These guys are the type that can write a check for a million or two or three pretty easily and itís because of the power and the strength of their businesses.
On the other hand, some of these guys work off the Internet, from their homes, and Iíve got nothing against thatóand some of them are fairly substantial as well. All Iím saying is that you kind of have to get a feel for these things and most of them just grow into it. Guys like Mike Maloney of goldsilver.com, who we spoke about on the last show: I donít know where Mike started exactly but I know that heís grown significantly from where he started and he can take very large orders at this time without batting an eye. I donít think that was the case when he got started. Iím not trying to scare anybody from getting into this industry at all, although I do not deal in bullion or coins, as most readers know. But itís an area that, in most cases, works out fairly easily, meaning you just kind of grow into it. You start off small, you take small orders, you get a reputation, and you acquire the knowledge necessary to hedge properly, learn how the wholesale market works, and realize what the dealer networks are like. You usually establish two or three people you basically keep doing business with over and over again on the wholesale side, and once those relationships are established, itís really not that tough a business as long as you run it correctly.
Mr. Martin: Letís talk about your Web site, silver-investor.com, and the multitude of resource thatís available there whether you want to purchase gold and silver or other precious metals or obtain some thoughts and ideas on possible publicly-traded companies that are producing these metals. Itís a subscription-based Web site and youíve got quite a following. Whatís the procedure?
Mr. Morgan: Well itís a twofold Web site, basically. Itís built for educating the general public so they can learn about the real economic picture, which Iíve been writing and speaking about for a very long time, and how the precious metals (especially silver) are required in todayís financial landscape. Then thereís a members-only portion, which is for people who are serious investors wanting to essentially make money in this sector by employing leverage through mining equities primarily. I talk about silver and gold, I talk about the macro picture in economics, and I also focus on mining companies from the top tier down. I love real metal and have advocated from the start that everybody start his or her precious metals portfolio with real metal, and I wonít back down on that. I really think if youíre going to be a gold or silver investor you should buy real gold and real silver and put it in your hands or get it in a location thatís very handy for you. However, if you really quiz any of these bullion dealers closely, youíll recognize that even they have made most of their money in the paper silver market and the paper gold market, and what I mean by that specifically is by buying the right mining companies.
We had Silver Standard at CAN$0.65, and it topped out at $40.00. Now the price is above $20.00, and most of our early subscribers are still holding, having sold some on the way up. But you know 20 times on your money, even in ten yearsí timeframe, is still a very good compounded rate of return. So the point Iím making is if you really want to catch the people who were able to buy silver at under $5.00 an ounce and gold under the $300.00 level, the way to play catch up is to get into the market when itís quietólike right now, when these prices are beaten up so badly. Although gold and silver are not selling for the same price as at the beginning of this market, some of the junior miners are! In other words, you basically are starting the race now all over again as far as Iím concerned. That means you can really make up a lot of leverage if you get into the right mining companies. Now again, I think you should have a balanced portfolio, which means you should balance it between the physical market and the equity market.
Mr. Martin: Weíve been speaking today again with David Morgan, and in conclusion I believe weíve determined that the real potential profit with regard to investing in silver is silver paper itself or silver stocks at this time and perhaps for the long run. More on this in upcoming broadcasts Iím sure. David Morganís Web site is silver-investor.com. David, thanks again for joining me today on the Opportunity Show. Find us on the web at theoppportunityshow.com.
Mr. Morgan has followed the silver market for more than 30 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.