The price of the dollar was down 50mg gold, to 27.8mg, or if you prefer
0.04g silver to 2.18g. Why do we measure the volatile dollar in terms of gold
and silver? There’s nothing else to measure it, certainly not the
dollar-derivatives called euro, pound, franc, yen, and yuan.
In the common tongue, gold was up $20 and silver rose 25
cents.
More importantly, we want to know what happened to the fundamentals. Read
on for the only proper fundamental analysis of the gold and silver markets…
But first, here’s 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 went sideways 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
The cobasis (i.e. scarcity) moved around and ended pretty close to where
it started. What’s notable is that this occurred when the price of gold was
rising. What you can’t see on this chart, is that in farther contract months
the cobasis fell a bit more.
The fundamental price of gold didn’t move much this week. In other words,
speculators pushed up the price but the fundamentals are holding.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
In silver, you can see that as the price of the dollar fell (i.e. the
price of silver rose) in the first part of the week, the cobasis went
sideways to down. But in the last part of the week, the cobasis shot up while
the price of silver fell a little.
It’s far too early to call a bottom in the silver price. However, the
movement on Thu and Fri is the sort of action we should expect to see more of
if silver is to return to a bull market. It will take more action like this
before we change our position on the white metal, but it is worth reporting
on what we see when we see it.
Our calculated fundamental price of silver rose 35 cents, to basically at
the market price.
We plan to drill down into the extraordinary move in the silver price
around Thursday’s silver fix. Look for our article this week.
© 2016 Monetary
Metals