Gold and Silver Supply and Demand Report, 14 August, 2016

The prices of the metals didn’t change much this week.

We thought we would take this opportunity to quote Warren Buffet. His comment at Harvard in 1998 earns him the despite of the gold community.

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

We don’t care much for his conclusion either: no need to own gold, nothing to see here about our failing monetary system, move along folks. However, he does have a point.

When the government expelled gold from the monetary system, it took away gold’s utility. Gold does not pay interest today. That’s why most people want nothing to do with it. And it’s also why the gold community is so focused on the price of the metal. Other than protect you from the End Of The World As We Know It, gold is a chip for betting in the speculation casinos.

Without interest, it cannot circulate as money. Interest is the flow regulator valve. Zero interest means 100% hoarding and 0% circulation.

The concept of utility comes from being able to use something. Money is used for investing and spending—precisely what the government has suppressed since 1933. So what’s left?

Price action.

Read on for the only the only true picture of the supply and demand fundamentals that ultimately drive the price action. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter aug 14 prices

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

The Ratio of the Gold Price to the Silver Price
letter aug 14 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 aug 14 gold

The basis (i.e. abundance) increased a but this week. However, our calculated fundamental price rose a few bucks.

The Silver Basis and Cobasis and the Dollar Price
letter aug 14 silver

The same exact thing occurred in silver. Slightly growing abundance, but our model shows a slightly higher fundamental price.

 

Keith Weiner will be in NYC the week of August 21. No seminar this time, but if you are an accredited investor and want to discuss gold investing, please contact us.

 

© 2016 Monetary Metals

13 replies
  1. CrazyG says:

    Greeting Keith;

    Everybody here, likes to talk about demand and supply, supposedly to indicate
    that this is the determining factor for prices of gold and silver…

    A review of the actual delivery of the supply to the demand in actual numbers,
    contradicts any such reasoning..

    According to data supplied by Bullion Star Blog, the actual amount of gold delivered from the Comex for all of the year 2015 was a total of “”” 54 Tonnes “””

    This is equivalent to what is actually delivered on any given WEEK on the Shanghai Gold Exchange..

    So what I’m saying, is the Shanghai Gold Exchange is “” 50 TIMES “” bigger and more important than the Comex…and nobody knows what is happening over on the LBMA, because it is so opaque, and they don’t publish any deliveries..

    I know you base all your analysis, and your blog, on what the pricing structure is on the Comex…. “”BUT””
    In my opinion, the whole of the Comex is a total shame
    Again, in my opinion, at some future day and time, something is going to happen to change all of this….

    What I would appreciate out of you, is for you to tell me, your opinion of how all this is going to come into effect…and how this will actually affect the price of gold/silver ..

    ABSOLUTELY, and MOST CERTAINLY…the pricing of gold will be done primarily on the Shanghai Gold Exchange….

    Just my opinion

    Take Care

    Tony

    • Bron Suchecki says:

      Hi Tony,

      Keith’s model is about splitting out fundamental price drivers from speculative ones. The fact that Comex has little to do with actual physical deliveries, as you say, would mean that it is a perfect input into the model if you want to get a read on speculators.

      Regarding SGE, it is certainly a physical market (note China also has a futures markets) but we don’t incorporate its prices into our model at this time as the one-way nature of the Chinese gold market means true supply/demand forces are not allowed to be expressed. When China feels confident enough to allow outflow of gold along with inflow and drop their quota system we would incorporate it. In any case, China’s importation of gold does have price effects in the markets where the gold is sourced, so that “fundamental” driver is picked up.

      Bron

      • CrazyG says:

        Greetings Bron;

        You said;
        “”In any case, China’s importation of gold does have price effects in the markets where the gold is sourced, so that “fundamental” driver is picked up.””

        You candidly admitted that the price is TOTALLY driven by speculation in the Comex market [without deliveries], yet you clam the opposite in your statement.
        There are few if any deliveries in the Comex market, and
        NO “”PUBLISHED” deliveries in the LBMA…
        Most, if not all the gold going into SGE, is in the form of Klg/bars that come out of refineries…NOT LGD bars ..

        The conclusion is >>>>>>>>>>>>>>>>
        You mathematical forumla is TOTALLY flawed and not worth the time you spend doing it..

        In simple terms, you don’t know what your saying, because it’s a simple prognosis of garbage in, vs garbage out…

        Take Care

        Tony

        • Bron Suchecki says:

          I’m not sure I understand where you get the idea I’ve “claimed the opposite”. There are other inputs into our model apart from Comex prices – do you think that is our only data source?

          You seem to put a lot of store into the amount of physical actually delivered. You could theoretically have only legitimate industry producers and consumers trading a futures contract without any speculators involved and yet still have zero physical deliveries. In the olden days futures markets warehouses were central points for delivery from producers, consolidation, and then shipment out to consumers. These days gold flows straight from mine to refinery to industry consumer, with that mine and consumer putting on shorts and longs, respectively, and then closing those hedges out. They do not take delivery but their trading is “legitimate” as it reflects real physical flows. The metal flows into and out of warehouses these days due to imbalances in those flows, with arbitraguers carrying or decarrying in response to market prices reflecting the hedging activities of these legitimate physical users, as well as speculators. Your focus on only physical warehouse movements as an indicator of the legitimacy of a market I would say is totally flawed.

          I think after having worked at a refinery that processes around 10% of world gold production with most of that shipped into India or China, that I do have a handle on how that physical is priced and traded (which can be on futures markets as well as spot OTC trading) and when Keith explained his model to me I didn’t see any problems. Always room for improvements, of course, but the basis of his basis is sound.

          • CrazyG says:

            Greetings again Bron;

            I guess the term, of what I looking to say, which is used in defining Gold pricing structure is one thing, and one thing only….

            STOCK TO FLOW

            With your analysis there is little or NO flow…

            Remember, that gold/silver never traded on the Comex until 1975, and that was only because the London Gold Pool failed to control the pricing of gold/silver.
            So, the powers to be sought a better way
            to do it and came up with a new venue

            Take Care

            Tony

    • rowingboat says:

      “A review of the actual delivery of the supply to the demand in actual numbers, contradicts any such reasoning”

      Quantify the impact that a rising gold price has had on bullion flow though Switzerland to ‘Eastern’ countries (including China) in 2016. In particular, compare the February to June timeframe with that of 2015. There has been a massive reduction of imports, indeed an overall slight reversal of the flow each month, as higher prices have taken their toll in the East. The large swing started in February, correlating with Keith’s falling cobasis from February.

      Interestingly, given that Keith’s cobasis has changed course and risen rather steeply in July, it will be interesting to note whether there has been a meaningful change of the Swiss flow dynamic when July trade data becomes available in 7 days time, i.e. whether Swiss imports from the East have also reversed course in July.

  2. Greg Jaxon says:

    Happy 45th anniversary, irredeemable currency!

    On another sorry note, I’ve had to block the server farm which delivers this blog’s notification emails
    (198.2.128.0/18
    The Rocket Science Group, LLC
    675 Ponce de Leon Ave NE Suite 5000
    Atlanta, GA 30308)
    …as of around July 20 it became a massive source of spam, most likely from a worm that pwn’ed the entire site-hosting service.

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