The price of silver abruptly dropped on Tuesday. There it was, sitting around $17.05 at 14:00 GMT. And boom. By 15:10, it was $16.78. Twenty seven cents of Fed-petrodollar-supporting non-profit illicit profits for da boyz in da cartel (you know who you are)!
Or was it…?
In the gold and silver communities, one needs no evidence to make such a claim. Any (downward) price move is taken to be evidence. It is those who reject this conspiracy theory who face the burden of proof. Very well, we have the data.
But first, let’s look at the context. Jay Powell, President Trump’s nominee to replace Janet Yellen as the top central planner, was testifying before Congress. He was painting an optimistic picture of the economy, and said he will hike interest rates. Rightly or wrongly, many people expect gold and silver prices to rise in a low-rates environment. So a rising-rates environment would be seen as bad for the metal.
The prices of the metals, silver especially, dropped. The price of gold recovered but that of silver did not. So the gold-silver ratio rose.
Next, let’s put this in perspective. If demand for real metal were robust, but there was shorting of futures in large enough size to push down the price by 27 cents, then silver (the March contract) would be backwardated by about 4%. No such thing occurred. Not even close. Indeed at the low point, the March silver basis was +0.7%. That is a proper contango (the cobasis was negative).
Basis, for a quick refresher, is the price of the metal in the futures market minus the price in the spot market. It is sensitive to trading in one market that does not occur in the other, or not commensurately. Cobasis is the inverse, spot – futures. Normally (Keynes idiocy notwithstanding) gold, silver, and ordinary commodities should be in contango. Contango is the word for a positive basis. Contango means there is not a shortage. Backwardation, by contrast, indicates a shortage.
So let’s look at the graph for gold first.
The basis (Feb contract) pretty much follows the price action. This means, the trading was driven by the futures markets (as speculators presumably sold gold in response to all the awesome awesomeness coming from the Senate).
Except it is interesting that, late in the day, the basis stays down while the price is bid up. This is buying of physical metal, pushing up price and down basis. The Monetary Metals Gold Fundamental Price rose $5.14.
Now here is silver.
We do not have that anomaly in silver. We pretty much see a close tracking of price action and basis action. Silver speculators unloaded their futures much more so than they did with their gold futures.
Surprisingly (or not), the Monetary Metals Silver Fundamental Price did not budge on Tuesday (well, it did drop from $17.1385 to $17.1379). This stands as testimony to the mere repositioning of speculators, with no real change in demand for metal (and to the stability of our algorithm).
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