The Cheviot Sound Money Conference - Is Silver the Trade of the Decade?

With the gold and silver prices having so recently ascended to new highs, last week's Cheviot Sound Money Conference at The Guildhall was extremely well timed to capitalise on investor interest in the sector.  We gold bugs live in a lonely minority so being surrounded by 300 like-minded prophets of monetary doom was a bizarre, exhilarating experience.   The universal view was that western government’s debasement of their fiat currencies, in progress since the demise of the Gold Standard, was in its final stages. Gold's continued rise against the US dollar must be seen as inevitable. 

Ned Naylor Leyland, partner of Cheviot Asset Management and Chief Investment Advisor to the precious metals fund Abydos Holdings, opened the extremely well attended day in impressive surroundings before introducing a formidable line up of excellent speakers including James Turk of GoldMoney.com, Dominic Frisby of MoneyWeek& Frisby’s Bulls and Bears,, Hugo Salinas-Price, David Morgan of Silver-Investor.com and Chris Powell of the Gold Anti-Trust  Association (GATA).   Here follow a summary of some of the key themes and ideas from the conference.  All speaker notes are available at the conference website.

 

Should Gold and Silver be re-monetised?

 Hugo Salinas-Price  (President of the Mexican Civic Association of Silver) www.plata.com.mx  argued that the logical consequence of the collapse of money is the return of gold and silver as money. He has long advocated re-introducing the Mexican silver peso. He was surprisingly confident that his labours would shortly be rewarded. 

“In 1910 the UK sovereign was worth £1, today it’s worth £240.” (Hugo Salinas-Price)

The silver sixpence was only withdrawn in 1946. Is reintroducing silver money therefore such a leap of faith? What better country to monetise silver than Mexico, the largest silver producer? Which country would most benefit from “re-inventing” such a sizeable new use? Wouldn’t a 2 oz silver Libertad worth say $75 be very popular, not least to 350 million Americans across the border?

James Turk, www.goldmoney.com , gave a convincing and thought provoking justification of why gold and silver were such long-enduring stores of value. He backed his case with an erudite historical analysis of gold’s place in banking and the gold standard from the founding of The Bank of England in 1694.

Although a strong bull for the gold price in the medium term James Turk felt that after an unbroken 10 year run, a short-term correction is now inevitable. Silver, being more volatile than gold, may have a steeper correction but he backs the silver price to relatively outperform the gold price in the long term.

 

Is the gold market manipulated?

 Chris Powell, of The Gold Anti-Trust Action Committee, explained why governments cannot be trusted in the precious metal markets. There was plenty here for the conspiracy theorists of whom there are many among the gold and silver bugs.  Some key quotes included: -

“Is there any gold in Fort Knox?”

“If it is who owns it?”

“Nobody knows, there have been no audits”.

“Governments have always manipulated the Gold Price. That after all was what the Gold Standard was!

“Central Banks main battle is against their own people.”

Governments have a long history of making owning Gold illegal when it suits them -  French Jacobins, the US in 1933, etc.

 

Is the gold market breaking down?

 Sandeep Jaitly explained that some thing very unusual, indeed highly odd, was indeed going on in today’s Gold Market. The market is in backwardation. ie the near positions offer a premium of 0.4% per month over the forward months. 

Physical gold is at a premium to the quoted market price which theoretically should not happen.  Are people losing trust in the non physical market? Spot gold is higher than the ETF price. Does this mean that some of the gold is not there?  The structure of the market appears to be breaking down. [Retail Gold ETF investors beware - you may not be buying the return that you think you are buying! ]

 

Is Silver the trade of the decade?

David Morgan, of www.silver-investor.com , confessed his fascination for silver began in 1964, at the age of 11.  He has promoted the merits of silver all his working life, which he does with eloquent passion.

While silver demand has outstripped supply for the last 10 years it wasn't always the case. The reverse was true for the 20 years previously - but much has changed since 1980: -

• World population up 176%
• People added to the middle classes 2 billion
• World GDP up 500%
• Gold above-ground stockpile up 600%
• Silver above-ground stockpile  down -(90%)

Silver Demand:

 David Morgan explained that the transforming change was that silver is increasingly an industrial metal, whose uses are growing by the day in our high-tech world. Silver usage therefore increases with rising GDP.

More patents are issued for silver applications than for all the other metals combined. Silver is the best conductor of electricity, one of the best heat conductors and the best reflector of light. 

Silver’s uses include: - photography, health and hygiene, computers, mobile phones, CDs & DVDs, microwave ovens, electrical contacts, solar energy cells & mirrors, RFIDs, batteries, the electrical grid, etc.. 

He singled out just two areas of growth, for silver, recently analysed by Jennifer Cross: -

• Solar & Mirrors: she estimated to grow, by 2014, to 130 million ozs. per annum.
• Food hygiene, Water Purification & Energy: estimated extra demand by 2020, 100 million ozs. per annum.

The elephant in the room is investment demand, which is growing at 14% per annum (100million ozs. pa). ETFs already hold 700 million ozs.

Silver Supply:

 The supply side is not so rosy. Supply and demand both rose strongly for the 10 years to 2008 with demand exceeding supply, as stockpiles shrank.

Both fell in 2008 when supply temporarily exceeded demand but total demand is now growing strongly up 18% last year.   From 2000 to 2010 mine output grew at between 2% & 3% compound.

This extra production, reaching 20 million oz. per annum in 2020, will by then add an extra 150 million oz. of supply. David Morgan doubts however if this extra output will fully materialise.

The demand increase cited above clearly cannot be met, along with the other expanding industrial needs. 

Where is the silver?

 75% of mined silver is the by-product of the output of other metals, such as gold, lead, copper, zinc etc. The base metal producers are not primarily concerned about their silver output, which they sell in the forward markets. The primary producers mainly are un-hedged and do not sell tomorrows output today.

If base metal mine output falls, as a result, for example, of a decline in Chinese growth, then silver output will fall regardless of silver demand.

David Morgan has been predicting the price of silver will rise for 20 years and particularly the last 10. He is now more confident that the silver price will rise than he has ever been. The trade of the decade will be silver he claims.

He is sure the shorts in the silver market they will be found out by the physical market in due course. “They will ultimately default; it will be called something else”.

 

Panel Discussion and Q&A

 Dominic Frisby of  Frisby’s Bears and Bulls and a regular contributor to www.stockopedia.com , who had been one of the speakers, ably moderated the discussion group.

Q & A   When will the market peak, how will we know the top? And other questions:

Answers

 When 3,000 oz of silver can buy a house in London. There was a time when  1,000 oz of silver bought a modest UK house.

The Top will be when governments cut their deficits and take the Paul Volker interest-rate medicine.

World debt is at a tipping point; gold will rise to $2,000 but $4,000 or even $8,000 is not impossible

Top will be when you can spend it. ie when gold and silver are monetised.

There’s very little silver around; the above ground stockpile is only one billion ozs.. That’s a current value of only $28 billion. Bill Gates could buy the lot.

We’ve had a 100 year bear market in fiat currencies and the fall is about to go exponential. 

The shorts in the silver market will be found out by the physical market in due course. They will default; it will be called something else.

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I left the conference doubting some of the most bullish claims for silver and some of the most bearish forecasts of the collapse of the $.  No one really knows how much silver is locked up in unwanted scrappable teapots, what alternatives and substitutes will emerge or how price rises will discourage investment or industrial demand. What we do know is that the market will always clear.  Even without wild enthusiasm I’m betting that it will clear at a higher price within 5 years; I’m morphing into a silver bug. 

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All speaker notes and full videos of all speakers are available at the conference website. You can also read a recent Stockopedia silver interview here with Jim Williams of Arian Silver (LON:AGQ).