Technical vs. Fundamental, Report 19 Mar, 2017

Every week we talk about the supply and demand fundamentals. We were surprised to see an article about us this week. The writer thought that our technical analysis cannot see what’s going on in the market. We don’t want to fight with people, we prefer to focus on ideas. So let’s compare and contrast ordinary technical analysis with what Monetary Metals does.

Technical analysis, in all of its forms, uses the past price movements to predict the future price movements. In some cases (e.g. momentum analysis) it calculates an intermediate signal from the price signal (momentum is the first derivative of price). But no matter the style, one analyzes price history to guess the next price move.

This is necessarily probabilistic. There is no way to know that a particular price move will follow the chart pattern you see on the screen. There is no certainty. And when it does work, it is often because of self-fulfilling expectations. Since all traders have access to the same charts, and the same chart-reading theories, they can buy or sell en masse when the chart signals them to do so.

We are not here to argue for or against technical analysis. We simply want to say that it’s not what we are doing. Not at all.

Our analysis is based on different ideas. The key idea is that there is a connection between the spot and futures market. That connection is arbitrage. Think of each market as a platform that moves up and down on its own vertical track. The two tracks are close together. And the platforms are connected to each other by a spring. Suppose platform A is a bit above platform B. If you push up on A, then the spring stretches a bit more and will pull B up, though perhaps not as much. The same happens if you push down on B.

Conversely, if you push down on A, then it will compress the spring and platform B will tend to go down, though not as much.

A and B are the futures and spot markets for gold (the same analogy applies to silver). Arbitrage works just like a spring. If the price in the futures market is greater than the price in the spot market, then there is a profit to carry gold—to buy metal in the spot market and sell a futures contract. If the price of spot is higher, then the profit is to be made by decarrying—to sell metal and buy a future.

There are two keys to understanding this. One, when leveraged speculators push up the price of gold futures contracts, then that increases the basis spread. A greater basis is a greater incentive to the arbitrageur to take the trade. Two, when the arbitrageur buys spot and sells a future, the very act of putting on this trade compresses the spread.

If someone were to come along and sell enough futures contracts to push down the price of gold by $50 or $150 or whatever amount is alleged, then this selling would be on futures only. It would push the price of futures below the price of spot, a condition called backwardation.

Backwardation just has not happened at the times when the stories of the big “smash downs” have claimed. Monetary Metals has published intraday basis charts during these events many times.

The above does not describe technical analysis. It describes physics—how the market functions at a mechanical level.

There are other ways to check this. If there was a large naked short position in a contract that was headed into expiry, how would the basis behave? The arbitrage theory predicts the opposite basis move. We will leave the answer out as an exercise for the interested reader, as thinking this through is really good work to understand the dynamics of the gold and silver markets (and you can Google our past articles, where we discuss it).

This check can be observed every month, as either gold or silver has a contract expiring (right now it’s gold, as the April contract is close to First Notice Day).

This week, the prices of the metals both rose. The price of gold is almost back to where it was the prior week, but that of silver is not.

Below, we will show the only true picture of the gold and silver supply and demand. But first, the price and ratio charts.

The Prices of Gold and Silver

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

NB: we switched from the April to the June gold contract.

As the price of the dollar fell (inverse of the rising price of gold, measured in dollars) we see the cobasis (our measure of scarcity) increased a bit. This means the buying in gold, which pushed up the price, was buying more of physical than of futures. This seems to be the new pattern of late, though it is sputtering a bit like an engine trying to start up and run at a steady RPM.

Our calculated fundamental price of gold is up nearly $50. It is now over $1,400.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

The story is the same in silver. Rising price accompanied by rising scarcity.

The silver fundamental price rose 50 cents. It is now aboit $1.30 over market.

 

© 2017 Monetary Metals

Why Did Silver Fall, Report 12 Mar, 2017

The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent.

The facile answer is manipulation. With no need of evidence—indeed with no evidence—one can assert this and not be questioned in the gold and silver communities. We have recently come across a term normally used to describe Leftists and Social Justice Warriors, virtue signaling. One piously declares that one supports the cause, one speaks truth to power, one sticks it to The Man, well you get the idea. The concept of virtue signaling seems equally appropriate to those who sing the chorus on every price drop, “manipulation.”

Besides, we have peeps in high places in London and New York and Beijing, and they tell us silver is manipulated…

Actually, we rather prefer to look at data than listen to whispers. What would the data show if demand for physical silver metal was robust and rising while someone sold so many futures contracts that the price of the metal was forced down just about a dollar?

The basis and cobasis are spreads between physical silver metal and futures. The scenario we just described would collapse the basis and skyrocket the cobasis.

Is that what happened this week?

Before we get that, we want to note that crude oil fell from $53.33 last week to $48.49, or -9%. Copper fell from $2.70 to $2.60, or -3.7%. Wheat fell from $4.53 to $4.40, or -2.9%. People miscall this deflation.

We don’t know whether this will affect the Fed’s seeming commitment to damn the economy, full rate hikes ahead. However, we do know that sentiment bleeds from one speculative asset to another (and in a near-zero interest rate environment, all assets are used by speculators). “If energy, industrial metal, and food are going down, then surely silver should go down too,” seems to be the logic.

At least this week.

We are much more interested in the supply and demand fundamentals. We acknowledge that speculators can temporarily move prices—sometimes a lot—but we firmly insist that eventually the market price reverts to the level called for by supply and demand.

So what happened to those fundamentals? Below, we will show the only true picture of the gold and silver supply and demand. But first, the price and ratio charts.

The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved up sharply this week.  If we were chartists, we might note that the ratio seems to be making a series of higher lows since mid-July.

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

As the price of the dollar rose through the week, so did the cobasis. The price of the dollar is the inverse of the price of gold in dollar terms, and allows us to see a clearer picture. It is not gold going anywhere, but the dollar going up and down. The cobasis is our indicator of scarcity.

While the dollar went up 0.5mg gold, the cobasis went up 24bps. This is the old pattern, rising gold scarcity as the dollar rises. The same happened in farther contracts, to a smaller degree.

While the market price of gold fell $24, our calculated fundamental price went down only $15. It’s more than $150 over the market price.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

The cobasis in silver actually fell. It didn’t fall a lot, but this drop came in a week when the price fell substantially. This puts the lie to the allegation of manipulation. Selling of futures would push the cobasis up.

Silver fell because owners of metal decided to sell and/or buyers of physical metal slowed their purchases. We can debate why they did that, but not the meaning of the data.

Note also the much lower absolute level of the silver cobasis. Silver is -86bps compared to gold at +8bps (a slight temporary backwardation).

The silver fundamental price also fell, about half as much as the market price. It is now $1.03 over market.

This means that, while those who need to unload their silver are unhappy, those planning to load up can now exchange the same quantity of Federal Reserve Notes for more silver than last week. With (slightly) better fundamentals too, as last week the fundamental was only $0.87 over market.

The only question on that front is the trend. For two weeks, the fundamental has become weaker.

 

© 2017 Monetary Metals

Worried You Might Buy Bitcoin or Gold, Report 5 Mar, 2017

The price of gold has been rising, but perhaps not enough to suit the hot money. Meanwhile, the price of bitcoin has shot up even faster. From $412, one year ago, to $1290 on Friday, it has gained over 200% (and, unlike gold, we can say that bitcoin went up—it’s a speculative asset that goes up and down with no particular limit). Compared to the price action in bitcoin, gold seems boring. While this is a virtue for gold to be used as money (and a vice for bitcoin), it does tend to attract those who just want to get into the hottest casino du jure.

Perhaps predictably, we saw an ad from a gold bullion dealer. This well-known dealer is comparing gold to bitcoin, and urging customers to stick with gold because of gold’s potential for price appreciation. We would not recommend this argument. Whatever the merits of gold may be, going up faster than bitcoin is not among them.

We spotted an ad today from a mainstream financial adviser. The ad urged clients not to buy gold. This firm should have little need to worry. Stocks have been in a long, long, endless, forever, never-to-end bull market. Gold is not doing anything exciting now. $1234? “WhatEVAH (roll eyes)!” Stocks, well, the prices just keep on going up. Like we said, nothing whatsoever to worry about. Other than declining dividend yields. There’s more than enough irony to go around.

Speaking of dividend yield, that leads us to an idea. Readers know that we like to compare the yield of one investment to another. This is why we quote the basis as an annualized percentage. You can compare basis to LIBOR easily. And also stocks. Or anything else.

For example, the basis for December—a maturity of well under a year—is 1.2%. The dividend yield of the S&P stocks is just 1.9%. For that extra 70bps, you are taking a number of known risks, and some unknown risks too.

It is worth noting that the yield on the 10-year Treasury is up to 2.5%. Yes, that’s right, you are paid less for the risk of investing in big corporations than you are for holding the risk free asset. Of course, the Treasury bond is not really risk free. But in any case, if the Treasury defaults then it’s safe to assume most corporations will be destroyed, if not our whole civilization.

We have heard the mainstream theory so many times, our heads are hurting. Here are the myths: the Chinese are selling, inflation is coming, and the economy is picking up.

China is selling. The Chinese people are selling the yuan to buy dollars. When they can get through the increasingly-strict capital controls. The People’s Bank of China takes the other side of the trade—selling dollars and buying yuan—to keep the yuan from collapsing. When a foreign central bank holds dollars, it does not hold paper notes. Nor does it deposit them in a commercial bank. It holds Treasury bonds. Its sales of Treasurys may look scary, but that is just the seen. The unseen is that the Chinese people are buying dollars. Those dollars come back to the Treasury market one way or the other.

Inflation is coming. The Fed is printing, the quantity of money is going up, there will be demand-pull, etc. Well, if that were true then the last place you would want to be is in an asset whose price is set by the net present value of its future free cash flows. Or at least the price should be. If you think that stock prices have to rise in inflationary periods, look at what happened in the 1970’s.

The economy is picking up. What can we say? There are two views on this. One has seen (or looked for) green shoots and nascent recoveries since the crisis. The other has seen rising asset prices, and with that a small wealth effect. We will not opine about Trump and the future of the economy here. We just wish to note that junk bonds have not sold off the way Treasurys have. Junk bonds have hardly sold off at all.

Quite the opposite. They have been massively bid up (i.e. yield has been crushed). We submit for your consideration that if inflation was coming and/or the economy was picking up, you would do even worse in junk bonds than in S&P stocks.

The 10-year Treasury hit its low yield (so far) of 1.3% in July. Since then, it has been a wild ride mostly up to 2.6% in December. Since then it’s been choppy but falling (i.e. prices rising a bit).

July also happens to be when the yield on the Swiss 10-year government bond began rising. It made a low of -0.6% (yes, negative). Since then, the yield has gone up (i.e. bond price has gone down) to near zero in December. It is currently -0.1%.

In Japan, the same occurred. Low yield on the 10-year government bond in July was -0.3%. High was hit in December. Still elevated now, but off the December high.

It’s almost as if government bond yields around the world were moved by the same drivers, or even connected by some kind of arbitrage…

Whatever the cause of this worldwide selloff of government bonds may be, it is not selling by China. It is not inflation. It is not expectations that the economy will take off under Trump.

Maybe it’s just traders looking at price charts, buying because stocks are going up?

This week, the prices of the metals dropped. As always, the question is what happened to the fundamentals?

Below, we will show the only true picture of the gold and silver supply and demand. But first, the price and ratio charts.

The Prices of Gold and Silver

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

This week, our old friend returned. He is the correlation between the price of the gold (i.e. inverse of the price of gold in dollar terms) and the cobasis (i.e. our scarcity indicator). They had been moving together.

This week, they met up for old time’s sake. The dollar is up from 24.75mg gold to 25.20mg. And the cobasis is up from -0.41% to -0.16%. At least in the April contract which is rapidly approaching First Notice Day, and already under downward pressure. For farther contracts, the cobasis is up, but not that much.

Our calculated fundamental price dipped twenty bucks. It’s still $150 over the market price.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

The cobasis in silver move up big-time as well.

The silver fundamental price also fell, about fifteen cents.

 

© 2017 Monetary Metals

Curious Gold-Silver Ratio That Did Not Fall, Report 26 Feb, 2017

This holiday-shortened week (Monday was President’s Day in the US), the price of the dollar fell. In gold, it fell almost half a milligram to 24.75mg, and prices in silver it dropped 30mg, to 1.7 grams of the white monetary metal. Flipped upside down, gold went up 23 notes from the Federal Reserve, and silver appears to go up by 41 cents.

Below, we will show the only true picture of the gold and silver supply and demand fundamentals. But first, the price and ratio charts.

The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved sideways again this week, which would normally be odd for a time when the prices of the metals are rising.

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

For a very long time, we would post graphs that looked almost the same. Oh, the specifics of month, price, and basis would be different. But they had a certain sameness. The price of the dollar (i.e. inverse of the price of gold, in dollar terms) would move along with the cobasis (i.e. scarcity of gold). So as the dollar would rise (i.e. the price of gold would fall), the scarcity would rise. And vice versa. This means changes in price were due to changes in behavior by speculators.

And now we have a clear picture of … the opposite. The dollar has been falling since mid-December. And for that same time, the cobasis (scarcity of gold) has been rising.

Yes, gold has been getting scarcer as it becomes pricier.

How could this be possible? Doesn’t the law of supply and demand work for gold? You know, the standard “X” graph from Econ. 101?

Gold has several unique properties. One is that it is not purchased for consumption, but for monetary reserves or jewelry (which in most of the world is monetary reserves). Contrast that to copper which is purchased by plumbing manufacturers to make pipe. It’s a competitive market, and if the price of copper plumbing goes up too much then home builders will switch to plastic. Demand drops as price rises. Also, the marginal copper mine will increase production. Supply rises as price rises. It is self-correcting.

Gold, not being bought to consume, does not have a limit to demand as price rises. If anything a rising price (i.e. a falling currency) signals to people that holding gold is a good thing. They were wise to get out of their falling paper currency, and should consider buying more gold.

Also, virtually all of the gold ever mined in human history is still in human hands. All of this gold is potential supply, at the right price and under the right conditions. Even if gold mining worked like copper mining, and miners could just produce more, changes in mine production at the margin are not material to the overall gold supply. By official estimates, the total inventory of gold would take over 70 years to be produced at current mine production rates (and we believe this is a low estimate).

Readers may object that this question is a bit unfair, as any commodity can experience rising tightness and that will accompany its rising price for a while until the market can correct itself. That is true, but what we are looking at in gold is not that at all. When the market corrects itself—which we think is very likely, we do not see Armageddon just yet—it will not be because gold miners have cranked up their outputs, nor because gold users have substituted another metal. There is no substitute for monetary reservation, particularly as paper currencies are in the terminal stages of failure.

Our calculated fundamental price is now up to almost $1,400.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

The trend of falling dollar (i.e. rising price of silver) and rising cobasis (scarcity) is here in silver, too, but it’s weaker.

Silver does not quite have the same stocks to flows ratio as gold, but it has far and away a higher ratio than copper or any ordinary commodity. That is why silver is the other monetary metal.

The fundamental price of silver is now up to about $18.70. While this is over the market price of the metal, it’s not nearly so much above as gold.

This is why we calculate a fundamental on the gold-silver ratio over 74.

 

© 2017 Monetary Metals

Don’t Short This Dog, Report 20 Feb, 2017

This week, the prices of the metals mostly moved sideways. There was a rise on Thursday but it corrected back to basically unchanged on Friday.

This will again be a brief Report, as yesterday was a holiday in the US.

Below, we will show the only true picture of the gold and silver supply and demand fundamentals. But first, the price and ratio charts.

The Prices of Gold and Silver
letter feb 20 prices

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

The Ratio of the Gold Price to the Silver Price
letter feb 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 feb 20 gold

The price was unchanged, but the basis is up slightly and cobasis is down (i.e. gold became slightly more abundant). This is not the news dollar shorters (i.e. those betting on the gold price) want to see.

Our calculated fundamental price is all but unchanged around $1,360.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter feb 20 silver

In silver, the basis is basically unchanged but the cobasis went up a bit. The silver market got just a bit tighter, and our calculated fundamental price is up more than 30 cents to about a quarter above the market price. Not exactly “bet the farm with leverage territory”, but definitely not “short this dog” either.

Watch this space. We have some exciting data science to reveal soon.

 

© 2016 Monetary Metals

Silver Futures Market Assistance, Report 12 Feb, 2017

This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again?

This will again be a brief Report this week, as we are busy working on something new and big. And Keith is on the road, in New York and Miami.

Below, we will show the only true picture of the gold and silver supply and demand fundamentals. But first, the price and ratio charts.

The Prices of Gold and Silver
letter feb 12 prices

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

The Ratio of the Gold Price to the Silver Price
letter feb 12 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 feb 12 gold

Again, we see a higher price of gold (shown here in its true form, a lower price of the dollar) along with greater scarcity (i.e. cobasis, the red line).

This pattern continues. What does it mean?

First, it means the price of gold is being pushed up by buyers of physical metal. Not by buyers of futures (which would push up the basis, and reduce scarcity).

Second, if it continues too much more, it means nothing good for the banking system. There is one force that can make all the gold in the world—which mankind has been accumulating for thousands of years—disappear faster than you can say “bank bail in”. The force is fear of counterparties, fear of banks, fear of currencies, fear of central bank balance sheets… fear of government finances.

We want to emphasize that the gold basis is not signaling disaster at the moment. It is merely moving in that direction, for the first time in a long time. It has a ways to go yet.

Our calculated fundamental price is up another $40 (on top of last week’s +$40). It is now about $130 over the market price.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter feb 12 silver

Note: we switched to the May contract, as March was becoming unusable in its approach to expiry.

In silver, the story is a bit less compelling. The scarcity of the metal is holding, as the price rises. However, scarcity is not increasing.

Were we to take a guess, we would say there is some good demand for physical, and the price action had futures market assistance.

While the market price moved up 44 cents, our calculated fundamental price moved up … 46 cents.

 

© 2016 Monetary Metals

Gold and Silver Divergence, Report 5 Feb, 2017

This week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when the prices are rising. Everyone knows that the price of silver is supposed to outperform—the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it so.

This will be a brief Report this week, as we are busy working on something new and big.

Below, we will show the only true picture of the gold and silver supply and demand fundamentals. But first, the price and ratio charts.

The Prices of Gold and Silver
letter feb 5 prices

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

The Ratio of the Gold Price to the Silver Price
letter feb 5 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 feb 5 gold

Do we have rising price of gold, up $25 (i.e. falling dollar, from 26mg to 25.5mg gold)? Yes. Do we have rising scarcity of gold (i.e. the cobasis, our measure of scarcity)? Why yes, we do.

This resumes the pattern that began the last week of December. The price of gold made a low of $1,127 (i.e. the dollar made a high of 27.6mg). Since then, the price of gold has been rising (i.e. the dollar has been falling) while the scarcity of gold has been rising.

Not a lot. Not Defcon 5, gold is going to spike to $10,000 (i.e. the dollar is going to crash to 3mg gold). Not a big obvious crisis-looking sort of move. Just a gradual move from -100bps to -68bps. What makes it significant is that it occurred with rising price. Gold is becoming scarcer as its price rises.

So far, this move has been driven by buyers of physical metal.

Our calculated fundamental price is up $40 to stay about $100 over the market price.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter feb 5 silver

In silver, there is quite a bit more volatility in the basis. And though the March cobasis is up, farther contracts do not show the same move.

Our calculated fundamental price did move up a bit—15 cents. However, it did not keep up with the market move. So now it’s basically even with the market price. It turns out speculators did think that silver ought to outperform gold, and they tried. They caught up to and passed the buyers of physical metal.

We note that in the futures market, the open interest in gold turned down sharply starting last week. However, silver open interest diverged, and continued to skyrocket.

 

© 2016 Monetary Metals

Silver Speculators Gone Wild, Report 29 Jan, 2017

This week, the prices of the metals had been up Sunday night but were slowly sliding all week—until Friday at 7:00am Arizona time (14:00 in London). Then the price of silver took off like a silver-speculator-fueled-rocket. It went from $16.68 to $17.25, or 3.4% in two hours.

What does it mean? We don’t know. We would bet an ounce of fine gold against a soggy dollar bill that no one else does either. The old stories of silver shortage or manipulation have no power to explain this move. Why not? Because they are old. The explanation would have to say that earlier in the day there was a reason for silver to trade well under $17 but as of that moment, it was urgent that the metal trader well over $17.

As often occurs, once the move hits certain levels on a price or momentum chart, that’s all it takes. It’s of no use to say that in the long run this will be just another blip of noise. In the heat of the moment, these 60-cent moves are exciting.

Below, we will have an intraday silver chart that shows clearly something that is almost never available to the public. We have a plot of the basis against price. If other theories are right (e.g. manipulation, shortage) this chart should show nothing of interest.

We are at no risk of that. 🙂

But first, the price action and regular basis charts.

The Prices of Gold and Silver
letter jan 29 prices

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

The Ratio of the Gold Price to the Silver Price
letter jan 29 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 29 gold

The pattern of the past few weeks did not continue. This week, when the price of gold went down, the cobasis (scarcity) went down on some days. When the price went up, the cobasis went down.

Our calculated fundamental price fell $32 to just about $100 over the market price.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter jan 29 silver

In silver, scarcity increased a bit on Wednesday and stayed there through Friday (for our normal daily reading, but see below).

Our calculated fundamental price moved up 20 cents from last week. It had been higher, but actually fell a bit on Thursday and Friday. It is now a dime or two above the market.

Below is the chart we promised at the top of the Report.

Intraday Friday Silver Basis Silver Price
letter jan 29 silver specs

(times are GMT)

As the price rises about 40 cents, the basis rises about 60bps from around -0.25% to +0.35%.

To understand this, picture a spread between the price of silver in the spot market—a bar—and silver in the futures market—a contract for March delivery of a bar. When the market is quiescent, this spread is consistent. If there buying pressure in spot, then the spread will compress. If there is buying pressure in futures, then the spread will widen (or if it is negative like Friday morning, it can go positive).

On Friday, this spread widened about ¾ of a cent. This may not seem like much, but the market makers are fighting it all the way. They make money by buying spot and selling futures, called carrying silver. Carrying tends to compress the spread. Despite the market makers, the speculators forced this spread wider by nearly a cent.

Spread is much more stable than price. This move is a big deal.

 

© 2016 Monetary Metals

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

A Hint of Gold Backwardation, Report 15 Jan, 2017

Last month, we noted that there could be a trend change in progress. Not only are the prices of the metals rising (which is just a mirror-image of the dollar falling, from 27.6 milligrams of gold just before Christmas to currently under 26mg). But the scarcity of gold as we measure it, using the spread between the price of gold in the spot and futures markets, has been rising.

What could cause this? One thing is for sure. It is not about the quantity of dollars. This theory is as popular as ever, despite the absolute lack of a rising gold price from September 2011-2016. The quantity of dollars has risen steadily since then.

We write much about the frequent cases when traders place big bets on something which is wrong. But the fact of their big bets drives up the price. Suppose speculators were betting on a big increase in the quantity of dollars under Trump. Then we would see a rising price alright, but we would see a rising basis—our measure of abundance of gold to the market. This cannot explain the current market either.

So what can? Recall Keith Weiner’s gold backwardation thesis. In times of stress or crisis, it is always the bid, and never the offer, which is withdrawn. Suppose the US Geological Survey were to make a dire announcement—THEY ARE NOT SAYING THIS, SO DO NOT MISCONSTRUE!! Suppose they said that there will be an earthquake in LA, an 11 on the Richter Scale. Nothing taller than a dollhouse will be left standing.

There would be no lack of offers to sell real estate. Some would hold out hope of getting “their price”. Others would generously offer to discount it 10% or 25% from the previous level.

However, what would be conspicuously absent would be a bid. Most likely from Santiago Chile to Vancouver, British Columbia and as far east as the Mississippi River. At least until the quake hit and the danger was passed.

It is gold that will withdraw its bid on the dollar. The bid sputtered 8 years ago, and intermittently since then. Then it has mostly been steady in the past few years. And now there is a hint of it, in the February gold contract. It’s just what we call temporary backwardation—a short term blip confined to the near contract that is heading into expiry.

However, we think it is notable. It means someone or many someones are switching their preference to gold, in spite of the higher yields available in the market now. Or maybe because of it. This preference, unlike speculators buying futures with leverage, is not about betting on price. It is about safety. Gold, unlike a bond, does not default.

Is this the explanation, and the whole explanation? We don’t know. We can only report that there is a change in behavior in the market. Whereas previously—this was the pattern for years—a rising price was accompanied by rising basis. And now we have rising price and the cobasis is rising instead. Rising scarcity rather than rising abundance.

To be sure, it is still a nascent trend. There is no guarantee that this won’t go poof like it has in the past. We will keep showing the data, and calling it like we see it.

Indeed, look for a new website soon. We plan to have more charts, many more, and updated daily. Including one data series that all the experts said could not be calculated.

Below, we will look at the supply and demand fundamentals for gold and silver. But first, the price action.

The Prices of Gold and Silver
letter jan 15 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 15 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 15 gold

Look at that rising red line, the cobasis (our measure of scarcity). Since mid-December, it has moved opposite to the green line, which is the price of the dollar. Previously, they had moved together. That is, a rising dollar (i.e. falling price of gold, as measured in dollars) went with rising scarcity of gold, and a falling dollar had falling scarcity.

And now they are opposite. The more the price of gold is bid up (i.e. the more the dollar is sold), the scarcer gold becomes.

On Friday, our calculated fundamental price was just about $100 over the market price.

The February cobasis is +0.12%. That is, the Feb contract is backwardated.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter jan 15 silver

In silver the cobasis is rising a bit, though it is at a much lower level. Far from backwardation, it is -.90%.

Our calculated fundamental price moved up 3 cents from last week. It is no longer above the market price, as that moved up a lot more.

 

© 2016 Monetary Metals