At the risk of being boring, there’s not a lot to say about the markets
for gold and silver this week (and frankly being on a challenging travel
itinerary, flying from Vienna to Sydney to give a keynote at the Gold
Symposium this week, is part of it). There was a modest drop in the prices of
the metals, $13 in gold and 21 cents in silver. As it usually does, the
silver price moved more than the gold price.
Of course, it’s only boring if you aren’t in the markets. If you are then
quiet weeks are OK, but you still pay attention.
It’s the basis that tells us what this means, if anything.
Read on for the picture of supply and demand fundamentals…
First, here is the graph of the metals’ prices.
The Prices of Gold and Silver
We are interested in the changing equilibrium created when some market
participants are accumulating hoards and others are dishoarding. Of course,
what makes it exciting is that speculators can (temporarily) exaggerate or
fight against the trend. The speculators are often acting on rumors,
technical analysis, or partial data about flows into or out of one corner of
the market. That kind of information can’t tell them whether the globe, on
net, is hoarding or dishoarding.
One could point out that gold does not, on net, go into or out of
anything. Yes, that is true. But it can come out of hoards and into carry
trades. That is what we study. The gold basis tells us about this dynamic.
Conventional techniques for analyzing supply and demand are
inapplicable to gold and silver, because the monetary metals have such high
inventories. In normal commodities, inventories divided by annual production
(stocks to flows) can be measured in months. The world just does not keep
much inventory in wheat or oil.
With gold and silver, stocks to flows is measured in decades. Every
ounce of those massive stockpiles is potential supply. Everyone on the planet
is potential demand. At the right price, and under the right conditions.
Looking at incremental changes in mine output or electronic manufacturing is
not helpful to predict the future prices of the metals. For an introduction
and guide to our concepts and theory, click here.
Next, this is a graph of the gold price measured in silver, otherwise
known as the gold to silver ratio. The ratio moved up slightly this week.
The Ratio of the Gold Price to the Silver Price
For each metal, we will look at a graph of the basis and cobasis
overlaid with the price of the dollar in terms of the respective metal. It
will make it easier to provide brief commentary. The dollar will be
represented in green, the basis in blue and cobasis in red.
Here is the gold graph.
The Gold Basis and Cobasis and the Dollar Price
Still the scarcity of gold tracks the price of the dollar in gold.
Our calculated fundamental price barely budged, and is now $100 over the
market price.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
The price of the dollar in silver terms rose. But the scarcity of silver
did not move proportionally.
Alas, for any hapless silver bettors out there (not Monetary Metals
readers, we trust!) the fundamental price dropped slightly more than the
market price.
© 2015 Monetary
Metals