The gold price moved up $18. However, the silver price moved up 60 cents
which is a much bigger percentage. The silver community is getting pretty
excited.
A market trend will often begin when a small number of traders learn
something new. As they begin buying (or selling), the price begins to move.
Others become aware of the truth, and they begin buying. There’s just one
problem with these moves.
By the time most people hear about it, the fundamentals have changed. Oh
the discovery may still be true, but the new, higher price offers no bargain.
For years, silver has been priced in the market above its fundamental
(with a few momentary exceptions, such as one year ago). The fundamental
price was way below the market, and led it down.
Then this summer, the market and fundamental inverted as the market price
fell. The fundamental caught down to it by July 14. In the last week of
August, another inversion occurred. The market price dropped through the
fundamental, which was rising by then.
Now the market price has shot up, probably for two reasons. One is the
persistent rumors of silver coin shortages that people
mistake for a silver bullion shortage. The other is the
nonfarm payrolls report, which they interpret as a green light for more
quantitative easing. Add to this the fact that the gold
price is rising in the face of strong fundamentals, and people buy up silver.
Read on, for the only true picture gold and silver 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 down 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 (scarcity) is largely tracking the price of the dollar in gold
(the inverse of the price of gold in dollars—which is what most people think
about).
We have several reasons why we insist on looking at the price of the
dollar. One, repeated often in these Reports, is the fact that gold is money.
The price of everything should be quoted in terms of money. Uncle Sam’s green
paper is not money. It’s, well… it’s Uncle Sam’s credit paper. It, too,
should be quoted in terms of money. It is now below 27mg gold, an interesting
line in the sand.
There’s another reason. It lets us compare the scarcity of money to the
price of the dollar. As the dollar goes up, it’s generally correlated with
gold disappearing from the market. Why is that?
There is no way to understand this, without first understanding that gold
is money.
Under stress, it is always the bid that withdraws. Never the ask (or
offer). Think of a rumor of a financial institution becoming insolvent. There
is no lack of offers to sell its stock, but there can be a market condition
of no bid.
Gold is gradually withdrawing its bid on the dollar. This has nothing to
do with QE, unemployment, CPI, GDP, macroprudential supervision, or
any other high-sounding term to come out of the Fed or the mainstream
economics profession.
It has to do with the twin dollar pathologies of rising debt and falling
interest. These flaws are fatal. They are inexorable, like plate tectonics on
Earth. And they will be fatal.
Owners of gold increasingly wonder why they should bid on the dollar. Or,
if not, they bid and buy dollars, and the new owner of the gold wonders. And
so it goes, like bankruptcy as described by Ernest Hemingway. “Gradually,
then suddenly.”
We are in the gradual phase now. If you are wishing for a much higher gold
price (i.e. a much lower dollar price) be careful what you wish for. We
rather suspect you won’t like the world, when the dollar is 6mg gold.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
There’s a lot to say about silver this week, and lots to show. First,
notice the drop in the cobasis as the dollar dropped in terms of silver.
Let’s take a look at the continuous silver basis and cobasis from June
through today.
The Continuous Silver Bases
Backwardation has disappeared, almost as quickly as it appeared.
The Market and Fundamental Prices for Silver
Last week, we said:
“By our calculation, the market price of silver is at or above its
fundamental.
Now it’s a 30-cent gap.
The fundamental price (shown in black) is much less volatile than the
market price. Speculators can be manic depressive, as some great minds have
observed for many decades.
Could the market price go up from here? You bet (to choose, perhaps, an
unfortunate idiomatic expression). We would almost expect it to if the gold
price continues to rise towards its fundamental price (over $100 above the
market price).
Would we bet on it? Put it this way. The story of silver shortage (and
backwardation) is over. Even the December cobasis fell from near 1% in the
middle of last month, to below zero now. It is swimming against the tide, and
the post-2008 new normal to fall this close to expiry.
Keith is giving a lecture on one of the pathologies of the monetary
system. The interest rate is falling, falling. It will be Wednesday evening
in Zurich. If you would like to attend, RSVP here.
Monetary Metals is sponsoring a seminar in Sydney on Oct 28, to
discuss economics and markets, with a focus on how to approach saving,
investing, and speculating. Please register here.
© 2015 Monetary
Metals
