The Trump Weak Dollar Report, 22 Jan, 2017

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.

The Prices of Gold and Silver
letter jan 22 prices

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.

The Ratio of the Gold Price to the Silver Price
letter jan 22 ratio

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
letter jan 22 gold

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%.

Let’s preview a chart that will be publishing on our site soon.
20170120au_basis_term

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.

The Silver Basis and Cobasis and the Dollar Price
letter jan 22 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

Silver Smoking Gun to Stop Dishonest Dealing

Last week ZeroHedge reported on the amended London Silver Fixing Antitrust Litigation which included damaging chat logs provided by Deutsche Bank that reveal collusion between bullion bank traders to “shade”, “blade”, “muscle”, “job”, “spoof” and “snipe” the silver market.

While the amended complaint only provides selected examples from the 350,000 pages of documents and 75 audio tapes that the plaintiffs received as part of the settlement with Deutsche Bank, what has been provided shows cliques of traders who worked together against the interests of their clients.

Below is a network map of these cliques, which shows every trader mentioned in the complaint with the lines indicating who chatted with whom (view the map online here).

fixplayers

The key ringleader is DB Trader-Submitter A (submitter refers to their role submitting orders into the London Fix) and this sort of hub and spoke model is common in social networks. The two persons with a slash and two banks in their name indicate that they moved banks during the period of the complaint. This is not uncommon in bullion banking since it is a small industry and would increase the risk of collusion between former workmates, something the management of the banks should have been alert to.

The lack of connection between these groups is likely due to them being in different timezones. The group of four in the top left corner are most likely in Singapore, given the use of Singlish terms like “lah” in the chats. The larger group is based mostly in London with one in New York, based on references in the complaint. The group of three at the bottom may be in Dubai, although that is speculation.

The chats have a jovial feel with traders calling each other “bro”, “dude” and “mates” and show no care for clients on the other end of their schemes: for example, Deutsche Bank Trader B talks about  “wanna ramp it up like really just buy at mmkt and fk everyone so bad”. No doubt these chats will now be a lot more stilted as traders realise that collusive behaviour brings with it personal consequences like jail terms, as it did with LIBOR.

Nick Laird at goldchartsrus.com has collated all the chats in chronological order here with a chart of the silver price underneath to help put the chats in context of market price action at the time. In general, the chat logs show collusion to tactically/short-term manipulate the London Silver Fix and spot market (curiously, there is no mention of Comex futures, but the plaintiffs are only giving us a sample in this complaint).

With the Deutsche Bank chat logs showing a collusive network across banks, it would seem unlikely that the defendants will be able to refute the antitrust claim by the plaintiffs. The next question is that of damages. As it stands, the tactical nature of the manipulations means that the defendants are likely to argue that the members of the class action can only claim damages if they traded at the same time as the chat evidence shows market manipulation.

To cover the entire class and increase the damages, the plaintiffs need to show that the traders’ actions resulted in ongoing suppression of the silver price.

In the chats the traders do not explicitly indicate any plans to suppress the price on an ongoing, multi-day/month/year basis or reference having to manage a large naked futures short position (which many have said is necessary for ongoing price suppression to exist). Monetary Metals has written on the naked short theory in the past, noting that it is not supported by observation of prices as contracts approach first notice day. To implement such an ongoing suppression using futures, the bullion banks would need to roll their oversized short position by purchasing the expiring contract and shorting the next contract. Such massive buying of an expiring contract would cause the basis to rise, yet the opposite occurs – see here for more details.

Absent such explicit proof of suppression, the complaint masses a number of different econometric analyses to show that the London Silver Fix impacts other silver prices in the wider market.

The analysis does not start off well where, on page 40, the plaintiffs fall for the “correlation proves causation” fallacy claiming that “the prices of COMEX silver futures contracts are directly impacted by changes in the Fix price, which determines the value of the physical silver underlying each COMEX silver futures contract” on the basis of a regression analysis between futures closing prices and the Silver Fix of 99.85%. The defendants will be able to rebut such claims by referring to papers like London or New York: where and when does the gold price originate? which show that neither London (spot) nor New York (futures) are dominant in terms of price and that the dominant market switches from time to time.

We feel the plaintiffs are on stronger footing when comparing spot and futures price movements around the fix (see page 71 onwards, figures 24 to 28). The plaintiffs’ show a few charts demonstrating a spot to futures linkage but we would suggest that to win the case the analysis would benefit from looking the spread between spot and futures markets, or the basis, which we report on each week. For an example of the application of basis to forensic price analysis, see our November 13 report where we show that the drop of $30 in the gold price around the London Fix on November 11 was driven by selling of futures as the gold basis began to fall before the price did (see below).

letter-nov-13-gold-intraday-2

The final challenge for the plaintiffs is to prove that the impact of the banks’ manipulative actions persisted “well beyond the end of the Fixing Member’s daily conference call” (see pages 81-83). While the plaintiffs claim that this is proven because the mean of the cumulative unadjusted returns “on Down Days does not recover fully from the price drop that occurs at the start of the Silver Fix”, the very wide confidence interval implies that on a number of days it did recover. It will be interesting to see how the defendants respond to this crucial claim.

The Deutsche Bank chat logs have enabled the plaintiffs to get over the first huge hurdle of showing antitrust behaviour. The focus of media reports to-date on the colorful chats gives the impression this is a closed case but the lack of explicit chats discussing management of a large naked futures short position and/or plans to supress the price over months is unusual. One would expect that managing such a large ongoing supression would be the main focus of discussions between traders. It is possible that the plaintiffs may have withheld this evidence for strategic purposes but if not, this case may end up turning into a battle of the bookworms with academics arguing econometrics and questioning what does the “mean of the cumulative unadjusted returns” really mean.

Whichever way the case develops, bullion banks now have increased costs of supervising and managing the risks that precious metals trading desk “bros” might be looking to “fk” their clients. Combined with the potential that the “cost of doing business will jump – perhaps by 300% on one estimate” due to Basel 3 rules, some may decide to do a Deutsche Bank and pull out of the market. The result may be further consolidation in bullion banking and give regulators more justification to push those that remain out of “dark” OTC trading and on to “lit” exchanges.

Friction and Gravity, Report 11 December, 2016

The price action was mixed this week. Those hoping for dollar declines in gold terms were disappointed. However, silver gave them a sop as the price of the buck declined by one one-hundredth of a gram of silver. In Monetarist terms, gold went down $18 and silver up 11 cents.

Monetarism, in its insistence that the dollar be used to measure gold, is in denial that the value of the dollar is unstable. Everyone knows that the Fed tries to devalue the dollar at 2 percent per annum (as it reckons it), yet insists on using it as the meter stick for measuring economic value.

The big story this week is the silver manipulation lawsuit. We remain flabbergasted that people think the price of a commodity could be suppressed by 75% (or a lot more, by some allegations) for years. We also note that the anger is not on the part of silver buyers. It’s would-be sellers who are upset. They wanted to sell at higher prices, and they allege the banks beat them to it, and the price fell before they could unload.

We will publish an article this week by Bron Suchecki, which looks into this scandal with our unique combination of economics, market mechanics, and data.

In this Report, we will give an update on those pesky fundamentals. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter-dec-11-prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It fell a bit more this week.

The Ratio of the Gold Price to the Silver Price
letter-dec-11-ratio

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
letter-dec-11-gold

The price of gold fell (i.e. the price of the dollar rose, green line). Look at the dollar, shooting the moon on the top-right corner of the chart! This is bad for those hoping to buy dollars in the near future, as the same gold will buy fewer of the Fed’s Notes.

However, most people speculate heavily on the dollar and the majority of their wealth is in either dollar-denominated securities or in the form of credit granted to the Fed and the banks. That speculation worked out well this week, as it has for the second half of this year.

Our measure of gold’s scarcity, the cobasis, moved sideways while the price of gold dropped. Unsurprisingly, our calculated fundamental price of gold fell again. It’s now $1,190.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter-dec-11-silver

In silver, we see an 11-cent rise in price but the cobasis is falling.

Our calculated fundamental price moved up to over $15.

The speculation in the wake of the Italian referendum last weekend did not hold. Nor did a bigger wave on Wednesday, which took the price to over $17.20. The fundamentals act as an anchor. It’s no guarantee of a price change in the immediate term, but over the intermediate to longer term, they’re an anchor. Friction and gravity will win in the end (unless the fundamentals change before then).

 

© 2016 Monetary Metals

Dang It Gold’s Supposed to Go Up! (Report 4 December, 2016)

We’ve gone through a succession of events and processes that were supposed to make gold go up. The following list is by no means exhaustive:

  1. Quantitative Easing
  2. Bernanke’s Helicopter Drops
  3. Janet Yellen’s Keynesianism
  4. Obama’s Deficits (US government debt is now a hair away from $20,000,000,000—and that’s just the little part of it they put on their balance sheet)
  5. The election of Trump
  6. The Italian Referendum (current as we write this)

Each has been good for a little blip that has been forgotten in the noise. We are seeing articles now that have moved on to the next old-new story. It seems that Trump is going to spend a lot on infrastructure. This will require massive deficits. But the market will distrust that the government can pay. So we will see a twin sell off of the US dollar in terms of other currencies, and Treasury bonds in terms of dollars. This will cause the mases to Discover Gold and the gold price is going to skyrocket. Click here to buy our fine gold, we have the very best gold.

We get it. Everyone thinks that interest rates are going up because inflation because more spending. Actually not quite everyone—our view is that the drivers which have caused the interest rate to fall for 35 years are still in full, deadly effect. Nor the folks who are bidding on junk bonds, or stocks for that matter.

But most everyone. Rates have to go up, because they’re lower than ever before history. Right?

And if rates are going up, then so is gold, right?

The Treasury bond is payable only in US dollars. The US dollar, which is the liability of the Federal Reserve, is backed on by Treasurys. It’s a nice little check-kiting scheme. But besides that, the two instruments have the same risks. If you don’t like the bond, then you won’t like the dollar either. The day will come when en masse, the market decides it doesn’t like both of them, and gold will be the only acceptable money.

With due respect to our old friend Aragorn, today is not that day!

We believe interest rates are headed lower, not higher. But that said, we do not see any particular causal relationship between the interest rate and the price of gold. The former is the spread between the Fed’s undefined asset and its undefined liability. It is unhinged and while it could shoot the moon from Truman through Carter, it’s sailing in the other direction now. Down to Hell.

The price of gold is the exchange rate between the Fed’s liability and metal. So long as people strive to get more dollars—most especially including those who bet on the price of gold, and those who write letters encouraging the bettors—there is no reason for this exchange rate to explode.

To again plagiarize the Ranger from the North, the day will come when gold goes into permanent backwardation. But today is not that day!

Today (Friday’s close), the price of gold is down seven Federal Reserve Notes from where it was a week ago.

So where to from here? Are those dratted fundamentals moving?

We will update those fundamentals below. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter-dec-4-prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It fell a bit more this week.

The Ratio of the Gold Price to the Silver Price
letter-dec-4-ratio

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
letter-dec-4-gold

The price of gold fell (i.e. the price of the dollar rose, green line), and the basis (abundance) fell and cobasis (scarcity) rose just a bit.

Our calculated fundamental price of gold fell about ten bucks, now about $1,200 even.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter-dec-4-silver

In silver, we see a 14-cent rise in price but the cobasis is up.

The fundamentals got ever-so-slightly tighter. And our calculated fundamental price moved up to just under $15.

We note that speculators bid silver up this evening (Arizona time) in the wake of the Italian vote, some 30 cents to just under $17. But as of this publication, they couldn’t hold the line and the price fell back and is now a nickel below Friday’s close.

 

© 2016 Monetary Metals

Good News and Bad News, Report 27 November, 2016

Sometimes, we think that every story in the gold community has the same template:

  1. I have inside information to share with you
  2. My peeps are telling me that <XYZ> will happen
  3. If <XYZ> happens, then the gold price will go ballistic
  4. (<XYZ> will happen, I just know it)
  5. So buy gold now, to front-run <XYZ>
  6. If you, you will make lots of money
  7. (Money is not gold, but dollars)
  8. Unless The Dark Cabal acts in their old nefarious ways
  9. If The Dark Cabal does, then don’t blame us
  10. Like the last time we predicted $200 silver or $30,000 gold

We read articles this week, reporting that China is considering additional limits on importing gold, that the premium for gold in China hit a 3-year high, and imports into China fell in the month of October. At the same time, imports to India rose moderately in October, and of course there are rumors India will ban gold imports too.

Based on the above, should you lever up $6,600 in capital to bet on the price movement of $118,000 worth of gold? Or go bigger, lever up $66,000 to bet on over a million bucks of gold? If so, should you bet on a rising price—or falling?

We respectfully suggest that there is no information content in the import numbers (much less rumors of future political decisions). Zero. You cannot use them to predict the next price move.

In the same way that you could not predict either the US election, or the impact of the Trump victory on the gold price.

You can’t get there from here.

Why not? It’s because the gold market is huge. It’s even bigger than that. Virtually all of the gold ever mined in 5,000 years of human history is still in human hands. And all of that gold is potential supply, at the right price and under the right conditions. There are billions of people on the planet, each of whom represents potential demand for gold with the right price and conditions.

Even if the gold import numbers are accurate—a big if—they tell us nothing about global conditions of supply and demand. At best, import numbers tell us that some little piece of the total gold stocks is moving from one corner of the market to another. This is obviously of keen interest to refiners, logistics companies, vaults, and others who stand to gain or lose revenues when gold moves around.

But it is not a signal that can predict price.

If you want to predict the price, you need to see a complete and integrated picture of supply and demand for physical metal. Then calculate the price at which it would clear, if the aforementioned leveraged speculators were not manic (as in silver) or depressive (as in gold). You would have the Monetary Metals fundamental price.

This week was shortened due to the holiday of Thanksgiving in the US.

The price of gold fell $24. The price of silver went sideways, though with some volatility that took it near 16 bucks even. It seems there’s a rumor to be started here. If the Chinese and the Indians can’t buy gold, they will turn to silver and we will see the gold price languish while silver goes to $50—which will be a gold-silver ratio of 24:1! (warning: this is just for humor.)

So, really, where to from here?

We will update the pictures of the gold and silver fundamentals below. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter-nov-27-prices

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.

The Ratio of the Gold Price to the Silver Price
letter-nov-27-ratio

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
letter-nov-27-gold

For both gold and silver, we moved to the next contract (February and March, respectively) as the December contract was getting too close to expiry.

Bad news for gold speculators. Along with the falling price (on this graph, depicted as a rising price of the dollar, the objective view of what’s happening) we have a basis and cobasis that went sideways.

Gold did not become more scarce when its price dropped $24. So the fundamental price dropped more than the market price. It’s still twenty-five bucks above the market, but that’s a slim margin for error.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter-nov-27-silver

In silver, there is a somewhat different picture. Price is unchanged, but there is a falling basis and rising cobasis. The fundamental price of silver is up 40 cents.

So for silver speculators, we have a good news, bad news scenario. Good news: the fundamental price is up 40 cents. The bad news, it’s still $1.65 under the market price.

We frequently (well nearly every month) talk about shifting our graph from an expiring contract to a farther contract. So let’s look at a graph showing only the bases for the Dec and March silver contracts. We have depicted the spread between the two bases in grey.

The Basis for Dec and March Silver
letter-nov-27-decmarsilver

What’s happening here is that when the December contract is far out in time, its basis tracks closely with that of the March contract. This is Phase 1.

Then, around the beginning of August, it begins to deviate. There are three distinct effects causing the Dec basis to fall away from March.

The first is time preference, which appears in Phase 2. Think of carrying silver—buying metal and selling a future—as an investment. It has a yield, comparable to any other investment. The longer you have to lock up your money, the higher annualized yield you demand. On July 1 (the start of the graph), the Dec contract has 6 months to expiry. The Mar contract has 9 months. There is not much difference between a 6- and 9-month investment. But by August, December is approaching on the horizon, and the difference between a 5-month and 8-month investment is more significant. By September 30, the Dec contract now only has 3 months remaining whereas Mar has 6 months. Time preference increasingly favors the Dec contract, hence its lower yield as more market participants prefer it to the March maturity.

By the end of September, we enter a steeper region, Phase 3. At this point, naked longs—those who buy futures on leverage, without the cash to take delivery—may not be selling yet. However, for new positions the next contract is preferred as it has more time before expiration.

And Phase 4 starts around the beginning of November. By this point, naked longs are forced to sell Dec (if they want to hold their metal trades open, they can buy March).

Anyways, as each contract nears, the basis tends to fall. This propensity is noise, not signal (and it helps prove that there is not a large naked short position—if there were, the basis would tend to rise).

 

© 2016 Monetary Metals

The Dollar Is Rising, Report 20 November, 2016

“The problem with central banks is that they increase the quantity of money in the same way that the problem with piping sewage into a swimming pool increases the quantity of water.”

It’s not really about the quantity, is it? It’s about the quality.

We believe that millions of people can see that the quality of the dollar and its derivatives—such as the euro, pound, etc.—have falling quality. Most of them are not (today) betting that therefore an ounce of gold will buy more of them. They are in stocks or real estate, which “should keep up with inflation” they think. We wonder if their child was in the pool, if they would think that an inflatable duck would keep up with the effluent…

However, sufficient numbers of people are speculating in gold and silver. This is what adds energy to these markets, and it’s energy that causes the price to move in both directions. There is little agreement (in the broader sense) about whether gold is going up or going down in the intermediate term.

There was some agreement that the Trump election would cause the former. That was when the dollar was a lot weaker than it is today. Before the election, the greenback was worth about 24mg of gold or 1.7g of silver. As of Friday, it rose to 25.7mg gold and 1.9g silver.

We suggest that you think of the dollar’s value in gold, rather than gold’s value in dollars. You know that the dollar has unstable value, which is generally falling for many reasons including that the Fed has a deliberate policy of debasement. We believe the dollar is not suitable for measuring value especially over longer periods of time, and manifestly not suited to putting a value on gold. Price is not the same concept as value.

Now it appears president-elect Trump is talking about a trillion-dollar stimulus program. Will this finally cause a breakdown in the dollar? Will it cause a breakdown in the Treasury bond market?

These, by the way, are separate questions. The dollar could be sold, if savers prefer pounds or euros or yen or yuan or some other dirty shirt that happens to be derived from the dollar. We see the usual suspects claiming that the dollar will collapse soon, or even that its collapse is imminent. From their writings, you would not know that the dollar is in an uptrend. A strong uptrend. An uptrend that goes back to 2011 or arguably 2008.

You would not know, from reading this stuff, that the dollar is higher in terms of the other paper currencies than it has been since 2003. It’s at a 13-year high. So far.

The dollar could be sold, in preference to gold too. However, that is not really happening in a big way right now, obviously.

The question of the interest rate is separate. The dollar is a closed loop system. So whether the dollar sells off against the euro, or whether it is bought against the yuan (as now) the interest rate is unaffected. The interest rate is set inside the dollar system. It is the inverse (conceptually) of the price of the bond.

Nearly everyone today believes that the bond has to head down because Janet Yellen. Or because Donald Trump. Or because quantity of effluent money. Nope. That is not how it works. For those interested, Keith has written a theory of interest and prices.

By the way, the same market that has given us a weak Treasury bond price is also giving us a strong junk bond market and endlessly rising equities. At least one of the three (A) falling Treasuries, (B) rising junk bonds, and (C) rising stocks is wrong. And possibly all three.

The dollar is literally backed by the Treasury bond. If you don’t like the low interest rate on the bond, then why would you prefer the dollar? Dollar cash has no yield. If you don’t like the risk of default of the Treasury, then you are no better off holding the dollar. There are few guarantees in finance, but I guarantee you that if the Treasury defaults on the bond, the Fed will default on the dollar.

And likewise, if you don’t like the Treasury, because inflation, you are definitely going to hate junk bonds. In a rising interest rate environment where there are gazillions of dollars of debt that have to be constantly rolled (not to mention the use of short-term financing of long-term assets), the marginal debtor will be squeezed to default. The US government is most certainly not the marginal debtor. That would be a junk bond issuer. Or many.

And in a rising rates environment, you will take no comfort in stocks. Forget the linear thinking of “keeping up with inflation”. Think of the yield of a stock. Why should stock yields go down and down, while Treasury yields go up and up? Why should stocks—with all the risks of owning the equity tranche of the capital structure—have a lower yield than the Treasury bond?

The Treasury bond is not riskless, contra the propaganda taught in finance since the end of the gold standard. However, stocks are certainly risk-full.

So where to from here?

We will update the pictures of the gold and silver fundamentals below. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter-nov-20-prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It rose some more this week.

The Ratio of the Gold Price to the Silver Price
letter-nov-20-ratio

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
letter-nov-20-gold

The price of gold, measured in dollars, dropped twenty bucks this week (shown as a rise in the price of the dollar, measured in gold, the green line on the chart). The scarcity as depicted by the cobasis fell. And remember, at this point there is unbalanced selling of the December contract as all longs have to sell unless they have $121,000 per contract to stand for delivery.

With a falling price of gold, and at the same time a falling scarcity, it’s no wonder that the Monetary Metals fundamental price of gold dropped. It’s still more than fifty bucks over the market price, but about fifty bucks below where it was last Friday. It seems the buying of physical gold metal has subsided somewhat.

Our old friend Backwardation is almost gone. The cobasis fell from 30 bps to 6bps.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter-nov-20-silver

In silver, we had a price drop of about 80 cents. And what did the cobasis do? It went sideways. Silver did not become more scarce at the lower price. And this is according to the December contract with its unbalanced selling. Which affects silver more than gold.

Farther-out contracts have a falling cobasis. That is silver became less scarce, and more abundant. Even while its price dropped almost 5 percent.

The fundamentals of silver, which were weak last week just took a big dive. The Monetary Metals fundamental price of silver was already a buck thirty under the market price. Now, it is more than two bucks under the new, lower market price.

Market participants are warring. A battle is raging between those who think the swimming pool is half full and those who think it’s half empty.

 

© 2016 Monetary Metals

Backwardation Profit Taking, Report 13 November, 2016

The big news this week is that Donald Trump was elected to be the next president of the United States. Whether due to his comments about restructuring the government debt, tariffs on imported goods, or other economic concerns, many expected news of his election to push up the price of gold.

They were wrong.

Every day since last Friday (November 4) has seen the price of gold falling. From a peak of over $1308, the price fell to $1227 on Friday.

There was a rally from $1269 to $1337 on the evening of election day, from 8pm to midnight in New York. This is roughly the time when election results began to trickle in and show that Trump was going to win. At the same time, the stock market tanked. S&P futures fell from 2150 to 2028, or -5.7%. Volume was off-the-charts high for US evening time.

But then what passes for normal took hold once again. The price of gold resumed its slide. The stock market recovered.

One thing is for sure. The price of gold does not go up for the reasons supposed by most gold bugs. Any more than it goes down for the reasons given by the propaganda of the paper bugs.

There is something else going on that could drive the gold price up. I refer to the new Indian policy of demonetizing larger-denomination cash (500- and 1000-rupee notes, worth $7.40 and $14.80—i.e. not so large). So many Indians rushed out to buy gold that credible sources report a temporary 20% spike in the rupee-price of gold.

We doubt that Prime Minister Modi can force many Indian cash holders to increase their bank balances. However, he could push the marginal cash holder to increase his holdings of gold. If that proves to be durable, that could drive the price of gold up substantially. This situation with cash and gold in India needs to be watched.

The price of silver took a big dive on Friday, ending down a buck twenty. Yes a buck twenty, as in -6.4% (the low of the day was 15 cents lower).

The question is: what did the election do to the fundamentals? Are people now stacking silver bars and gold coins, who had not been doing it before the election? Or is this price move just more noise that will be lost in a month, much less over the long term?

We will give a teaser. Something changed in the market this week.

We will update the pictures of the gold and silver fundamentals below, and show our first-ever intraday basis charts. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter-nov-13-prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It rose this week, how could it not with the big price move in silver?

The Ratio of the Gold Price to the Silver Price
letter-nov-13-ratio

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
letter-nov-13-gold

And now we see our old friend, who has been absent for a while. Backwardation. The cobasis is over +0.3% (30 bps).

We admit that we have a conundrum. We are not quite sure how to handle Friday. In the US, Friday was a bank holiday Veteran’s Day. The Treasury bond market was closed, as were the banks. However, the stock market was open as was the gold futures market. And there was high volume (the third highest day of the year, after Thursday and June 27).

We are including Friday.

Friday had a big price move in gold, with the dollar up almost 2/3 of a milligram gold (muggles will see this as gold going down -$32).

Last week, we said:

“Are we predicting a crash, much less on Monday morning (as we write this, the price of gold is down in Asian trading by $11)? No, but we are saying gold is not looking like a good value here. If you don’t have any, then there is never a bad time to buy. But if you’re trading a position, we could think of better times to buy than now. Maybe now (especially at Friday’s price over $1,300) might be a good time to consider selling a covered call.”

That was then and there (a week and 76 bucks ago).

And something else changed. The fundamentals got stronger. Unless this turns out to be an anomaly due to the bank holiday and the absence of some market makers, the fundamentals are stronger now than they have been in quite some time.

We calculate a fundamental price of over $1310.

We will take a look at intraday basis charts for gold and silver, below.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter-nov-13-silver

The same thing happened in silver. And unlike last week, it occurred across all contracts. Falling basis (abundance) and rising cobasis (scarcity). ‘Course, in silver, the price drop was epic, much bigger than in gold.

We calculate a fundamental price of just over $17. So, like with gold, we had buying of physical metal and selling of futures.

Many times over the years, we have seen reports of a big paper flush amidst strong physical demand. We have debunked several of them, and dismissed the rest.

What happened on Friday was different than those other events. Here are intraday graphs showing basis and price (the cobasis moved pretty much inverse to basis so not included to keep the graph as readable as possible).

Intraday Gold Basis and Price
letter-nov-13-gold-intraday-2

From just before 13:30 (London time, or 90 minutes before the PM gold fix), the basis begins falling. The basis is the spread of futures – spot. So futures begin selling off before even the price begins to decline. Shortly after 2pm, the price of gold is still holding at $1259, but the basis is already dropping. And boy does it drop, to a trough of -64bps. From there on, the basis recovers somewhat.

We have annotated the graph to highlight three distinct phases. In the first phase, it is simply selling, driven by selling of futures. How do we know? First, the basis begins to fall before the price. Of course, the fact that the price begins to fall while the basis continues to fall proves it. It is simple enough, lots of traders sold gold futures and the price fell around $30 initially.

The second phase is more interesting from a market theory point of view. Here we see the basis rising, and it’s a pretty big move up from a low of -64bps to -38bps—just about a 2/3 retracement of the original drop. However, the price is sideways to positive. The basis is changing but the price is not. In other words, the spread between futures and spot is compressing (basis is negative here, so rising value means tighter).

What this means is simple. For an hour and a half, the panicky herd of speculators stampeded at will. After that, the market makers were able to reassert some control. No, not over price but of spread! The market makers did not manipulate the price of gold up or keep it from falling. They began to decarry gold, that is sell spot and buy futures. This pushes down the bid price on spot, and pushes up the offer price on the futures contract.

Why would they decarry? To take profits, of course! In recent months, the profit on offer to carry gold has been very high. This has tempted many arbitrageurs to exploit the opportunity: by buying a bar of metal and simultaneously selling a futures contract. They are long metal and short a future.

When the basis drops, that provides an opportunity to close the position and make more than one would have made by holding to maturity. For example, suppose you put on this trade on June 27. You locked in a profit of 1.45% pa on your investment (in dollars, of course). Ever since then, the basis has been declining. Now the basis hit a low of -0.64b%. At that moment, the cobasis was +0.44% pa. So you could close your trade a month and a half early, and add 44 bps to your profit.

And after this, in the third phase, the basis goes sideways while the price falls another $13. In this phase, the arbitrageurs are still decarrying. What’s our evidence for this? The price is moving down, which means lots of selling again. But in this phase, the arbitrageurs are keeping up. They are decarrying as fast as speculators are selling.

As we have described in many past Reports, while basis is rising the marginal demand for metal is to go into the warehouse. It feeds the gold carry trade. We emphasize that when this builds up, it’s dangerous because the marginal demand can abruptly turn off and a new marginal supply come online. A high basis cannot predict the timing, but it can tell you that the market is ripe for a drop the way a supersaturated solution is ripe for a precipitation. They have seen their opportunity to profit, and are reluctant to keep holding their positions and risk the basis continuing to rise.

Intraday Silver Basis and Price
letter-nov-13-silver-intraday

We did not mark up the silver chart. It is interesting that the basis correlates more highly with the price. Or, in other words, while the selling pressure in gold largely abated, it continued in silver. The total drop in the Dec silver basis was nearly 100bps.

If you had carried silver on August 10, you could have locked in a profit of 156bps pa. If you decarried it on Friday, you could have added another 95bps pa.

If gold was in a supersaturated solution, then silver was in a superdupersaturated solution.

It will be interesting to see this week, if the arbitrageurs can catch up in silver and we see a rising basis. And if the elevated silver fundamental price of $17.08 holds.

It is also possible that some market makers were off on holiday on this Veteran’s Day.

© 2016 Monetary Metals

Gold Always Wins, Report 6 November, 2016

This week the prices of the metals, as measured in terms of the much-abused and much-hated but much-preferred US dollar, went up. +$28 and +0.66 respectively.

That’s a pretty big deal. So big, in fact, that a prominent voice for the use of gold as money tweeted about it. You may want to skip past this anecdote if you think the dollar is money and gold is just a commodity, like any other, that lets you make money by betting on its price.

Anyways, this guy said that gold is the best performing currency in 2016 adding that gold always wins (we prefer to focus on ideas, not people, so we have altered some details of the tweet).

This is a curious statement. To illustrate, let’s picture a country where slavery still exists (sadly there are such countries even in 2016). A man on the street declares “I will defy the Master.” That is not the statement of a free man, but of a disobedient slave.

Such it is with “gold is the best performing currency,” coming from someone who professes to believe that “Money is gold, nothing else,” as John Pierpont Morgan once put it. If you are a free man, you do not defy any masters. You simply go on about your life. And if gold is money, then it does not go up and down. It is simply the measure of up and down for everything else.

There is something else worth addressing in this tweet. Even if you think the dollar is money and gold is just another chip for betting in the speculation casino, you cannot say “gold always wins”.

We are not proponents of regulation, for the financial industry or any other. However, it is worth nothing that regulated financial professionals would never declare an asset to be a guaranteed winner. That is a false and misleading statement. In the case of gold, have we forgotten about 2012 through 2015 so soon (not to mention the dramatic drop in 2011 from well over $1,900 to close the year at $1,565)? The price of gold went down every year during this period, closing at $1675 in 2012, then $1,205, $1,184, and $1,069 for 2013 through 2015.

Regulation or no, the first principle has to be to tell it straight, risks and all. The price of gold can go down. Indeed it did go down in recent years. While many seem convinced that the price is likely to keep moving up from here, we have been sounding a cautionary note about gold and even more strongly about silver. They are currently bid in the market above the levels justified by their fundamentals.

We will update the pictures of those fundamentals below. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter-nov-6-prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It dropped this week, which is typical when the prices of the metals rise. Especially when they rise on speculation. Speculators favor silver over gold.

The Ratio of the Gold Price to the Silver Price
letter-nov-6-ratio

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
letter-nov-6-gold

Last week, we asked:

“Could the scarcity (i.e. cobasis, the red line) be rolling over? It’s too early to tell, but bears watching.”

This week, the price is up but the basis (abundance) is up and the cobasis (scarcity) is down. And sure enough, our calculated fundamental price is down $11 to $1,239.

Are we predicting a crash, much less on Monday morning (as we write this, the price of gold is down in Asian trading by $11)? No, but we are saying gold is not looking like a good value here. If you don’t have any, then there is never a bad time to buy. But if you’re trading a position, we could think of better times to buy than now. Maybe now (especially at Friday’s price over $1,300) might be a good time to consider selling a covered call.

We like to reiterate our advice to NEVER NAKED SHORT A MONETARY METAL. Something crazy can happen on the weekend and before you can get out of your position you could suffer terrible losses. Case in point this weekend, FBI Director Comey apparently re-cleared Hillary Clinton. Then when Asia opened for trading, the prices of gold and silver fell and the S&P stocks spiked up 1.3%.

There’s another lesson to be learned from this. Beware facile assumptions. Hillary would be bad for business, therefore bad for major corporations, therefore bad for the stock market (that is actually two facile assumptions).

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter-nov-6-silvedr

The December contract is definitely under selling pressure. If you own a Dec silver then you have to sell it before the end of the month. And obviously if you are opening a new position, you have little reason to buy December. Your broker will likely recommend March at this point.

Silver is much more affected than gold.

Let’s look at a graph of March and December silver bases to get some perspective.

The Silver Basis and Cobasis for Dec and Mar
letter-nov-6-decmar

Other than for December, the basis is rising and cobasis is falling.

By the way, this is one proof that debunks the manipulation conspiracy theory. If there was a massive naked short position in the futures market, then the banks would be forced to buy back the expiring contract with urgency (not being able to deliver metal, they would have to close their positions before First Notice Day).

Massive buying of an expiring contract would cause the basis to rise. However, that is not what we see as contracts approach expiration. We see a falling basis.

It is the longs who must close their position—i.e. sell—before First Notice Day. They’re speculation, and don’t have the cash to stand for delivery. The banks are arbitragers, buying metal and selling a contract to pocket a small profit.

This small profit is called the basis. For the March silver contract, the basis is 1.5%. Not a bad rate of return for an investment that is guaranteed to redeem your principal in less than five months. For reference, the 6-month LIBOR is 1.25% and the 6-month US Treasury is 0.5%.

Buying of farther-out contracts is so robust, that speculators are overwhelming arbitrageurs. Speculators are pushing up the price of the futures faster than market makers can borrow cash to buy metal and sell contracts to the speculators.

Despite the market price of silver going up, the Monetary Metals fundamental price of silver dropped by 21 cents, to $15.85.

 

© 2016 Monetary Metals

The Clinton-Comey Effect, Gold Report 30 October, 2016

Twice this week, the prices of the metals spiked. Once on early Monday due to a cause unclear to us. The second on Friday late morning (Arizona time) due to, get this, additional problems for Democrat Hillary Clinton. The stock market dropped at the same time that the prices of the metals surged. Call it the confidence speculation.

The price of gold ended the week +$10, and that of silver +$0.18.

Was it speculation? Or was it, this time for once, stackers going bananas buying up metal along with dried food, barrels of water, prime bunker real estate, and lead (ammo)?

Before we get to that, we want to tackle a fallacy that comes up over and over again. How do you define or measure the value of money?

The same school of thought that gives us the Quantity Theory of Money — which Keith has debunked decisively, and which we have spent so many words in this Report addressing its implications for the price of gold — offers a simple answer. Tempting, because it sounds so simple, it’s utter rubbish. What’s the idea?

You measure the money by its purchasing power. Prices are measured in money. So why not reverse it, and measure the money by … prices?! Well, for one thing, it’s circular. Self-referential. Infinite recursion, in the terminology of computer science.

But more importantly, this view lumps taxes, regulations, labor law, lawsuits, compliance and you name it, all together. If the government adds a costly new tax which wipes out half an industry, you can bet (literally!) that the product of the remaining companies will sell at higher prices. Maybe much higher prices.

But does this mean that the money has gone down in value? That it is on the path to hyperinflation, even? No.

Taxation is not a monetary phenomenon.

Further, suppose you look at prices in different cities. For example, things are cheaper in Yuma Arizona, than in New York City. Can we compare the Yuma dollar purchasing power to the New York City dollar? Of course not. It’s the same US dollar!

We contend that there is only one way to measure the value of the dollar. Look at its price in gold. As of Friday, that is 24.4 milligrams.

And how do you measure the value of an ounce of gold? Let’s make an analogy to gold’s abundance. We content that gold is the most abundant commodity (with the exceptions of air and water). How is that? We measure abundance, not by absolute quantity, but by a ratio of stocks to flows. It would take all the gold mines in the world many decades to produce the amount of gold now known to be held in human hands (which number we believe is underestimated substantially). No other commodity (except silver) comes remotely close to this.

The approach to measuring gold’s value is similar. The value of the next ounce (N+1) is measured relative to the prior (N). Let’s look at water to contrast with gold.

Suppose you’re walking through the Arizona desert in July. The temperature might be 120 degrees Fahrenheit (49C). You get so thirsty that you could die very quickly. You walk up to someone selling gallon jugs of water. What would you pay for the first?

It’s worth nothing less than your life.

How about the second? You will need it to walk back to civilization. The third? A spare. The fourth? Zero, zilch, nil.

Value(1) = ∞
Value(2) = 10
Value(3) = 1
Value(4) = 0

The value of each unit of water is not merely lower than the previous unit, but massively lower.

For gold (you knew this was coming) the value is flat. That is, anyone will happily accept the fourth gold coin just as the first. And the 104th the same as the 101st.

This is an important feature for money, is it not? It means that any business, no matter how large, can keep its books using gold. Even as the balance sheet grows, the value of the unit of account — the numeraire — remains constant.

Kind of like how engineers rely on the constant length of the meter stick, no matter how tall the building. Imagine if they used some sort of rubber band to measure length and the higher the skyscraper, the shorter the rubber band shrank! Construction above one story would be impossible.

Well, if the unit of account varied in value as water does, economic calculation beyond a simple subsistence farm would be impossible.

Read on for the only true picture of the fundamentals of the monetary metals. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter-oct-30-prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It didn’t move this week.

The Ratio of the Gold Price to the Silver Price
letter-oct-30-ratio

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
letter-oct-30-gold

Could the scarcity (i.e. cobasis, the red line) be rolling over? It’s too early to tell, but bears watching.

The fundamental price of gold barely budged, though it’s about twenty bucks below the market price.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter-oct-30-silver

Last week, we asked:

The big question this week: does the buying of metal remain strong, or is this just another flash in the pan?

So far, the buying has held up. The fundamental price is up just about as much as the market price.

Let’s put this in perspective. Below is a graph showing not the prices of the metals, but premium vs discount. The green region at the bottom represents discount, and thus a safe place to buy. The red region at the top represents danger, as you’re overpaying.

Note that silver has not been offered at a discount in quite some time. This does not mean that the price has to crash tomorrow morning. But it does mean you’re paying a speculative premium. Maybe you will get a chance to unload to the next speculator at an even higher price, but maybe not.

Gold was in discount through around the end of April. It tipped into discount at the end of August. It’s now selling at a premium, though not a large one.

The Premium on gold and silver
letter-oct-30-premium

 

© 2016 Monetary Metals

Wile E Coyote Gravity Report 23 October, 2016

Another week without much major price action, gold +$16 and silver +$0.12. At least if you look at the closing prices. However on Monday after New York market hours, there was quite a spike in silver. The close was $17.46. The price was up 10 cents by midnight in New York. By the morning before the open on Wednesday, the price was up another 20 cents, to $17.77.

We’re pretty sure that it had nothing to do with leaked emails from Hillary Clinton. However, it might have had something to do with the housing starts data release. Whatever the cause of this speculative wave, it was over by late Thursday.

The weak fundamentals reasserted themselves on silver, like gravity always does to Wile E Coyote when he runs off a cliff into thin air. Are those fundamentals changing?

Read on for the only true picture of the fundamentals of the monetary metals. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter-oct-23-prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It rose this week.

The Ratio of the Gold Price to the Silver Price
letter-oct-23-ratio

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
letter-oct-23-gold

Gold’s scarcity (i.e. red line, cobasis) is up this week, while the price of the dollar (i.e. green line, the inverse of the price of gold) is down. Not a lot, but a small sign of buying of metal as opposed to futures that has been the pattern for a while.

Further divergence, with falling dollar and rising gold cobasis would be bearish for the dollar (which most people equate to bullish for gold).

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter-oct-23-silver

Look at that. Big rise in the cobasis, while dollar falls slightly. Also, note the crossover of the basis and cobasis on Friday. Part of this is the approach of expiration. Both gold and silver contracts tend to move towards backwardation as they approach expiry (proof that it’s the longs, not the shorts, who are naked and must cover before First Notice Day). And silver does it more than gold, due to its inferior liquidity.

Still, this is something different than we’ve seen recently, as is readily apparent on the chart above. Premature to try to trade it, and the fundamental of silver is still well below market (though if you’re short silver against gold, you might close the position and take profits as we did on Friday at a gold-silver ratio of 72.4).

Our calculated fundamental prices: gold=$1247, silver=$15.69, ratio=79.5.

The big question this week: does the buying of metal remain strong, or is this just another flash in the pan?

 

© 2016 Monetary Metals