Little Change to Supply and Demand Report 25 Oct, 2015

At the risk of being boring, there’s not a lot to say about the markets for gold and silver this week (and frankly being on a challenging travel itinerary, flying from Vienna to Sydney to give a keynote at the Gold Symposium this week, is part of it). There was a modest drop in the prices of the metals, $13 in gold and 21 cents in silver. As it usually does, the silver price moved more than the gold price.

Of course, it’s only boring if you aren’t in the markets. If you are then quiet weeks are OK, but you still pay attention.

It’s the basis that tells us what this means, if anything.

Read on for the picture of supply and demand fundamentals…

First, here is the graph of the metals’ prices.

The Prices of Gold and Silver
letter oct 25 prices

We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

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

The Ratio of the Gold Price to the Silver Price
letter oct 25 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 25 gold

Still the scarcity of gold tracks the price of the dollar in gold.

Our calculated fundamental price barely budged, and is now $100 over the market price.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter oct 25 silver

The price of the dollar in silver terms rose. But the scarcity of silver did not move proportionally.

Alas, for any hapless silver bettors out there (not Monetary Metals readers, we trust!) the fundamental price dropped slightly more than the market price.


© 2015 Monetary Metals

9 replies
  1. Ratio says:

    Your detailed analysis and graphs are second to none in this field.

    In recent weeks, as your own graphs show, the price of the dollar in silver has dipped while the cobasis has not followed it proportionally. Similarly, in recent months, as one of your own recent graphs showed, the continuous cobasis has moved relative to the price, causing a trend change in your own fundamental price.

    Due I imagine to the bearish bias which has served you so well in the past four years, your accompanying commentary has ignored these rather salient indications emerging from your own underlying data.

    You do your readers a great service with your data. You could do them an even greater service with commentary that responds to a trend change promptly when it occurs, even when it conflicts with your own recent market bias.

  2. Ratio says:

    Additional point on the GSR. You have made much of the recent rise in the GSR, but while always being careful to acknowledge that there has been a fall recently, you have hardly done justice to its magnitude – in excess of 10% at times – or to the fact that the ratio has in fact stalled in the 75 region for a year, as also at previous peaks.

    When the ratio does fall next time, assuming a typical correction of 1 log, your indicators will at some point switch from bullish to bearish the ratio. But how prompt will they be, and how much of that 1 log fall will benefit those who consistently heed your analysis?

    If you go bearish the ratio at 60, your subscribers have likely lost almost half the benefit. If you wait until 50, you have failed them completely.

    You are still calling for 80 as the ratio kisses its old support line goodbye. When I first hear a robust call for a lower ratio, it will be instructive to see how much of the move has been missed.

  3. bbartlow says:

    Hey Keith… thanks so much for launching this effort. But next time, could you put on a seminar in the United States for a change? I mean heck, we’re trying to stack’em… not spend ’em!

    You might consider piggy- backing on the San Francisco Money Show (et al) the Denver Gold show, or one of the two Trader Expos. There are any number of investment related conferences that would love to have you.

    Okay, enough of telling you how to run your life. Let’s talk about our favorite subject: Money.

    Although gold is better money than silver, it seems that many PM investors (me included) prefer silver for the occasional Jato pack moves. Besides, with gold, it’s a drag when your entire net worth can fit into a couple of pants’ pockets. So you see, with silver we can buy more and feel better about ourselves.

    Sadly, the world is currently awash in silver. I mean, why else would the price just be sitting here between $14 – $16/oz?

    Not only that, but given the worldwide industrial slowdown that only promises to intensify, it would seem that stronger investment demand must make up the difference… or silver could suffer even further losses.

    Of course, before my fellow silver bugs pull out the razor blades (you can’t have mine!) don’t forget that the best cure for low prices… is low prices. That’s always been the case.

    Shifting gears a bit: Keith, I think many of us are curious about how your “fundamental price” is calculated. Did I miss that session… or is that proprietary ‘secret sauce’ kind of information?

    Anyway, using the term “fundamental price” implies that somehow it’s the most accurate assessment of value, rather than the market’s assessment. It further implies that the dollar price of gold or silver will be more inclined to trade at that fundamental price in the near future. Ceteris parabus of course.

    While I find your work intriguing, I’m not quite ready to believe that your equations have predictive value. But the proof is in the pudding as they say. If your calculations do have predictive value, sometime over the next several months gold should begin a march towards $1250. Again, ceteris parabus.

    At the same time, your fundamental price suggests silver may continue to wallow in the $14 – $16 area (if not lower) driving the GSR into the mid-80’s. Is that correct, my good man?

    I actually find that way of thinking very believable. In fact, to me another return to 100/1 makes sense too, especially in light of the worldwide slowdown/recession, etc. Truth is, we’ve been to 100/1 before… and there’s nothing magical about any of those numbers except investor perceptions, which can change. I mean, whatever happened to the old 16/1? Or 40/1? Things do change.

    Fortunately, I believe the longer this low price episode lasts, the better off silver bulls will be long term, especially if copper prices stay low too.

    Addressing the supply side further, miners have been hurt, yes…. yet they continue to produce healthy quantities of PM’s, which is not so good. It would seem that only continued low prices, and especially lower prices, would provide the long term impetus for a new bull market, at least from a short term supply point of view… something that might provide a catalyst for a move higher. But unlike the supply driven grain markets, the PM markets have primarily been demand driven, as PM supply has been amazingly consistent over the years… as you’ve pointed out a number of times on this website.

    So when will investment demand finally pick up? I wish I knew! But what too many seem to forget is that bear (or flat) markets can last years and years — even decades — longer than anticipated. Before gold’s launch in 2002, for example, gold had been wallowing for an unbelievable 20 years.

    In the end, at least gold is money… real money. And I’d rather take my chances on imperfect gold than the certain death of Federal Reserve “Notes”… which is just another word for debt obligation. With gold there is no counter party risk. None. And if you’d try to attribute that characteristic to anything else…. you’d be wrong.

    So, even while the world is awash in silver, it’s also awash in an endless supply of paper. We just have to suck up, probably buy more gold than silver at this particular point in time, and play out our hand. We do have the winning hand, after all, regardless of the next few cards.

  4. bbartlow says:

    But do you know how utterly strange that would be… for gold to rally $75.00 + and silver to do next to nothing?

    I’ve never seen something like that… and I don’t expect to.

  5. Keith Weiner says:

    Thanks for the comments.

    Ratio: Careful is a good word. I try to be careful not to bring emotion or expectations to the analysis. I have tried to be clear that there has been a change in the silver market. Or was. For a very long time, the market price was above the fundamental. And that reversed. But now the market price has gotten a bit ahead (and the fundamental price has weakened a bit, currently in the low 15’s).

    I hope (and expect) that when the trend is down in the ratio, that I will see it clearly and call it. Your point is well-taken, that often one calls a trend change after the big part of the move has occurred. That is particularly a danger on technical analysis which is trying to use price action to predict price.

    Re GSR, I am still seeing 82-83. One of two things will happen to change this. Fundamentals could change. Or price will tend to gravitate towards the target. I do note a few spike highs around 79 but they didn’t last

    The bottom line is: we shall see. My confidence is irrelevant. The proof will be in the pudding when it happens.

  6. Keith Weiner says:

    bbartlow: I did one event in NYC. I plan to do more in the US. Stay tuned and watch this space. By the way, though it’s not a Monetary Metals event, I am speaking at a Monetary Innovation Conference in DC on the 13th and in Phoenix in the 17th. Would love to meet you if you can make either.

    Agreed re: a rising gold price with flat or falling silver price. The world doesn’t expect this. Which from a contrarian point of view is kind of interesting, isn’t it? What happens when everyone is positioned on one side of the boat, and it’s the wrong side?

    Re: my model, I will be the first to admit it’s a model. Nobody knows the future. That said, it’s the only one that is based on measuring the right things. I believe it is a major innovation in market modeling. I am working now on back testing it over 20 years of data. I will have a lot more to say when that work is done.

    In the meantime, as you said, the proof is in the pudding. So far, it has kept me bearish about silver during a time that one should have been bearish–and against the consensus.

    As to the model itself… I have published a lot of material on the theory, and also discussed aspects in a number of the weekly Reports. But of course I have to keep the algorithms and code proprietary. This model is a major part of the research and development effort of Monetary Metals. I have invested about 6 years in this, and it is how I trade the Monetary Metals fund and also publish reports (which will include paid letters in the future).

    One of the reason for live-blogging my calls every week is so everyone can see what I said, when I said it, and how it worked out. Not in the immediate term (as today’s price action reminds me, once again!) but over the longer haul.

    As I mentioned in my response to Ratio, it will indeed be important to show that the model catches the turn when it comes. And not long after the turn has run the GSR down to 60 or worse yet 50. But to see it hopefully in advance of any significant move.

    All I can say right now is I am as comfortable as anyone could be, who sticks his neck out under the ax on purpose, and puts his name to a market prediction. :)

  7. jham says:

    “”””””””””(News) – The Federal Open Market Committee (FOMC) today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.

    The Committee has announced :

    “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.”

    “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely,” ”””””””””””””’

    There you have it folks. The Committee will speak to you again in December.

  8. bbartlow says:

    Very nice of you, Keith, to respond to recent posts…. thank you.

    Couple things. Sounds like you have a lot going, whether it’s money management, flying around the world, maintaining the Blog, etc. Can we find everything we need right here at Monetary-Metals to stay completely engaged… or are there other sites too?

    Secondly, please don’t feel any pressure to make a market call because of our peanut gallery comments here, especially mine. If a model is dictating your decisions (more or less) it’s best to let your system speak, objectively, for better or worse. Then, at least, we’ll know whether the model is working as expected.

    On the other hand, if something doesn’t ‘feel’ quite right, you can always offer a personal opinion ‘off-model’. By all means, feel free… just like (above) when you mentioned the GSR target of perhaps 82/83. Not sure whether that was a model-induced calculation or a personal opinion…. but if it’s an educated opinion (a mixture of the two?) it also means that if the market doesn’t achieve that target in a timely fashion, silver could be signaling unexpected strength. Exactly what we would expect at a major bottom.

    Where would we find details about your PHX presentation?


    • Keith Weiner says:

      bbartlow: I like to say that I am keeping busy and off the streets. I publish in three places (and most of my work is syndicated to other sites). This site is one. My column, The Gold Standard, is at And my personal blog is and that’s where I have all my more serious papers such as my dissertation, theory of interest and prices, etc. As well as lighter material, such as my current one, the Service Economy. :)

      The target of 82-83 is from the model.

      Look for info about the Phoenix (and DC) conference in the Report I will post later today.

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