The action favored bettors this holiday-shortened week (Monday was Martin Luther King day in the US), with the price of gold up 13 bucks and silver up 26 cents.
We noticed a worrisome remark by newly inaugurated President Trump. The strong dollar of the past 20 years, he said, is not good for American competitiveness. Let’s just tackle this straight on. Actually, we will address three distinct issues.
First, Trump said, “our companies can’t compete with China now because our currency is too strong.” Keith is old enough to remember long before the current scare about China, the scare was about Japan. Japan was going to bury American companies, and buy up America. Or so we were told. It would be interesting to look at the yen during this time, to see if it was falling and giving Japan some of the competitive advantage that Trump theorizes should occur.
As it turns out, it’s exactly backward. From a low of 0.33 cents in 1976, the yen rose to nearly 1.3 cents by the mid 1990’s.
Of course, this makes sense to everyone but benighted economists. How could draining away the savings of the people and businesses give any advantage? That is what currency devaluation really means. A loss of everyone’s savings. Poof.
This brings us to the alleged strong dollar. On January 22, 1997—exactly 20 years ago—the dollar was worth about 89mg gold. Compare to Friday, when it was just under 26mg, a loss of 71%. Orwell would be proud at this new meaning of the word strong!
Of course, no one any more believes in any kind of objective standard. The dollar, they think, should be measured by the euro, pound, and yen. And they, in turn, are measured against the dollar. It’s a neat little trick, a sleight of hand, to distract attention from wholesale theft.
Finally, we have Trump advisor Anthony Scaramucci, who said the rising dollar will “have an impact internally in the US”. He spoke of “reaching out for lower-class families and middle-class families.”
To reaching for… that is a good visual for this. The government will reach for their savings!
Fortunately, under the current structure, the president does not have the power to push the dollar down. Heck, the Fed has been trying to do that for years, and has not been succeeding. However, this is a worrying development that bears close watching. Can anyone—including Trump—say what he might do?
Below, along with the fundamentals, we show a hint of what’s coming soon at Monetary Metals. But first, the price action.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It fell a bit this week.
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.
We have switched to the April contract.
In a continuation of what seems to be the new pattern, we have a dollar that continues to slowly fall. But, unlike the previous mode, we have a rising scarcity of gold. That is, the price of gold is rising because buyers in the physical market are getting hungrier, while sellers in the physical market retreat.
However, note that the slope of the red line is not steep. And, unlike the February contract, the April future is nowhere near backwardation. The cobasis is -0.8%.
The term structure shows the basis and cobasis for contracts going out a year and a half. This is generally where all the interesting features would be. Note the absence of any interesting features. Just a nice gentle rise in the basis and fall in the cobasis, exactly what we would expect (other than the small backwardation in the Feb contract which is sliding off the left edge into oblivion).
Needless to say, this is not a picture of any kind of shortage, imminent banking crisis, or magic trick by the UN or International Monetary Fund.
While the market price of gold moved up a bit, our calculated fundamental price move up more. It’s now a bit over $1,300. Not crisis territory by any means, yet interesting in light of a market price at $1,210.
Now let’s look at silver.
In silver the cobasis is also rising, also slowly.
Our calculated fundamental price moved up 50 cents from last week. It is now just about at the market price.
© 2016 Monetary Metals