The last part of the PDAC 2019 conference series will focus on gold and silver. See previous articles on platinum and palladium, as well as copper and rare earths.
Note that I will not be naming any names of conference presenters here, but rather gauging mood and sentiment of the overall conference attendees. The objective is to focus on where the gold and silver sentiment may be moving, rather than to focus on specific analyst commentaries.
The mood at PDAC, at least among newsletter commentators and mining company executives, was that gold and silver are in an upswing with strong fundamental tailwinds. After all, the world is awash in debt and the Fed’s change in direction in 2018 led to a strong stock market correction in Q4.
With the Fed recently reversing its stance on the number of rate hikes, and hinting at potentially moving back to the accommodative fiscal policy of the past, it appears that the QT model has essentially been mothballed. What do the current world economic factors predict with regards to gold and silver prices? We’ll touch on some thoughts gleaned from the conference.
Analyst Thoughts on Gold
We are all analysts of sorts, but some (like myself) have decided to put their thoughts into a professional newsletter. Being a newsletter writer, I enjoy listening to other analysts to see their line of reasoning in for or against the precious metals.
Conference analysts expressed the typical concerns among market contrarians. Chief among the concerns is the national debt level in the US and in the European Union. These debt levels, having reached historic levels, cause concern within the market. The Yield curve inversion that started in 2018 in US treasuries, and around the world, cause analysts to look beyond the current monetary and fiscal system into what next steps will be.
Those next steps include a return to some sort of gold standard, not like the Bretton Woods system. In other words, many analysts do not believe governments will monetize gold directly, but that they will continue to include, through legal frameworks such as Basel III, gold as a Tier 1 asset supporting the monetary system. Therefore, there is consensus that gold will be a major pillar in any new financial system order we see in the next 10 years regardless if it is recognized officially as money.
Gold As Money Alternative vs Gold As a Fair-weather Asset
The conference highlighted the typical dividing lines among gold analysts between gold as a paper portfolio asset and gold as a physical safe haven from fiat system collapse. There persists, among more mainstream analysts, that gold ‘has its place’ as an asset holding, but not much beyond that. Those analysts tend to ignore the monetary history of gold and see it more of a place to stash cash during recessions. In other words, they trade in and out of gold as they see fit depending on the level of systemic risk they see within the market.
Others persist with the theory that gold is not only a safe haven, but a long term store of wealth and an historically viable alternative to the modern fiat/debt based monetary system. Personally, we align more closely with this group of analysts because the failures of debt-based systems are well chronicled. The thought here is that where governments and central banks can influence the value of currency through their fiscal policies, gold stands against these manipulations to allow people to store at least some of their wealth over time.
Unless gold is made the monetary standard, people are still subject to inflation of the money supply in their daily transactions for goods such as food and housing. This is the system we use now. Monetizing gold again would prevent any central authority from using the currency inflation tax from taking value from the people and transferring it to the central treasury that issues the currency and gets the full purchasing power of that currency over time. I did not see widespread acceptance of gold as the default monetary standard. It does not appear that “gold as money” sentiment will increase until the current fiat debt system fully collapses. We are not there yet.
Gold Miners and Stocks
Most people I know who invest in gold do it through a fund or through company stocks. Funds allow trading in and out of paper forms of ‘gold’, allowing exposure to the spot price for the purpose of stabilizing portfolio risk levels. This system works until the current paper system collapses, and those traders don’t appear to have plans what to do when that happens. They do not appear to believe it ever will, despite the many harsh lessons of history.
Gold stock investors love the leverage that miners provide to the gold price. Miners provide leverage because essentially stocks are a Ponzi investment driven by sentiment. In other words, stocks tend to perfectly embody the hysteria that comes with any investment bubble. Right now, the miners are unloved, and therefore stocks trade below traditional accounting measures such as project Net Present Value (NPV).
Therefore, mining stock analysts argue the companies are ‘undervalued’, though this is largely just an opinion. It is, in fact, an opinion we at Gold Silver Pros held for quite some time until we finally admitted stocks are large a game of love me / hate me. What gold stock analysts believe will happen is when money flows to the metals it will boost the spot price. In turn, market generalists that don’t typically cover mining stocks will switch to gold companies.
And hence, institutional investment will increase, thereby boosting gold stocks up on the love side of the equation. Data presented at the conference suggested that more generalists are turning their attention to gold sector due to the Q4 correction in the broad stock market. As that trend continues, expect your popular gold stocks to continue to rise.
Gold juniors, or companies that are either exploring or just developing their properties, are a particularly darling of some conference commentators. The juniors are a hyper-leveraged speculation on future gold and silver prices. But, they are highly risky, boom-bust plays. One well known and respected conference analyst noted that 80% of junior stocks are busts, quoting Mark Twain’s thought that most “mines are holes in the ground with a liar standing beside it”.
Where only 20% of junior stocks will ever provide their stock investors a profit, one should spend a lot of time in research or finding a newsletter analyst with an established track record. Not a recommendation, but the only gold and silver stock analyst who I have ever seen publish an audited report of results is John Doody at Gold Stock Analyst. I did not see John as a presenter at the conference, but I have had access to his newsletter in the past and know of his audited results.
If you are a gold stock speculator, you could make a lot of money. But understand, mining stocks are highly volatile and investors can quickly switch to the hate side of the ledger on any particular company. This will swiftly reduce stock valuations, often typically happening within a single day. Those paper losses become real when it comes time to sell and take cash out of your brokerage account.
The Mood on Silver
Many analysts are really bullish on silver because silver has served both as money and as an industrial component critical to our modern society. The dual role makes the metal attractive to two wholly separate types of investors. We have documented the many ways in which modern industry demands silver to support our current lifestyles. In fact, we have produced an infographic documenting silver’s history of use for medicinal purposes dating back hundreds of years.
While industrial demand has begun to put pressure on silver supplies and production, monetary demand will drive larger increases in future valuation. Silver is tied to the green movement, and it is possible that the duality of silver will be reflected in an energy-money hybrid system. This system would see silver as a trade-able market commodity focused within the energy space. The demand for efficient energy is so strong that it is unlikely commerce will allow silver to be minted into government coins with a primary function as broad, public money.
Development of advanced energy technologies like zero point energy would of course change this dynamic by reducing the need for perfecting efficiency within transmission systems. However, silver would still be preferred in basic energy infrastructure due to its superior conductivity over other metals. Copper, aluminum, and even gold can be substituted for silver in specific applications. But broadly, silver is still the best metal for electrical-conductive applications. Therefore, I do not see silver becoming government-sanctioned money.
Silver as Off-Book, Poor-Man’s Money
We do see silver serving such a role in the off-markets where people are looking for alternatives to the fiat money system. Due to the value of silver in the market, in which the spot derivative price has not yet caught up with, most believe physical silver to be a bargain. We strongly support this belief, and have published numerous previous articles on the subject.
The market is never wholly efficient, but more so when authorities’ constant intervention within it. And further when speculation is allowed to grow beyond the physical markets for which our commodities are based. Because we are not in a true open market for commodities, price dislocations exist. This is why silver will serve as a source of “unofficial money” when the global financial collapse/reset occurs. People will have no other choice than to turn to silver when a) western fiat systems fail and b) they cannot afford gold even at its current price, as most people without substantial savings cannot.
A cogent question will be whether political authorities enact legislation defining uses for silver specific to non-monetary use within the energy and medicinal sectors. Within that new policy would have to be a provision to purchase up existing silver supplies, especially in the form of government minted silver coins. Those who buy silver now would likely profit handsomely from selling those silver supplies into the markets that will need them for the economy to resume growing.