First, here is the graph showing the prices of the metals in dollar terms. There was a little motion upwards, but mostly sideways and down.
Gold and Silver Price
One cannot truly understand the gold market in terms of the quantity of dollars the Fed “prints”, by looking at price charts, nor by reading open interest charts (see below). One must look at the basis (see here for a basic explanation). Week after week, we have been saying that the positive basis, i.e. contango is disappearing (hence the name of this report). This is a process of gold withdrawing its bid on the dollar. One cannot understand this if one lives in the dollar bubble, looking at the gold “price” as if it were comparable to the wheat price or the Mercedes E500 price. What would a falling gold “price” mean? The gold “bull market” is over? And when it rises, does that mean sell to take “profits”?
In this report, we have been tracking the temporary backwardation in both metals.
This week, the gold basis continued to fall and the cobasis moved higher to its record high. We show December as well as June and we see the same thing in both months.
Last week we said, “We will have to watch it [the cobasis] closely this week, but as the roll accelerates (naked longs must sell June and buy August), if we do not see a rising cobasis that will be like the dog that did not bark in the night.” Not only did we see a rising cobasis in June but also in August (not shown for ease of reading) and December.
Gold Basis and Cobasis
Here is the basis chart for July and December silver. The cobasis just does not want to rise the way it is for gold.
Silver Basis and Cobasis
Here is the graph showing the ratio of gold to silver. Volatility still occurred this week.
Gold to Silver Ratio
We remain cautious on silver, priced in gold. We think the ratio is more likely to rise than to fall.
Now let’s update our look at the open interest for futures contracts in both metals.
Gold and Silver Open Interest
Open interest has been rising for weeks in gold, not so much in silver. To put this in perspective, open interest in gold (post 2008) peaked at 650,000 contracts Nov 10, 2010. We are now 30% lower. In silver the prior record was 163,700 in silver Nov 5, 2010 but this was surpassed on Apr 11, 2013 at around 167,000 contracts. We are now about 12% below that peak.
We will discuss the open interest further in a dedicated article.