Monetary Metals Supply and Demand Report: May 12, 2013

The dollar gained this week about 0.3g, which means gold “went down” $22. The gold bugs may be feeling cheated again. We are more interest in the basis than the price.

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

Letter May 12 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

Letter May 12 Gold

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

Letter May 12 Silver

Here is the graph showing the ratio of gold to silver. Volatility still occurred this week.

Gold to Silver Ratio

Letter May 12 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

Letter May 12 OpenInt

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.

11 replies
  1. petter_w says:

    After having watched the video on temp. backwardation I see you expect all months to go into backwardation when the backwardation becomes permanent. The backwardation in the nearest future months are supply bottlenecks but not a sign of distrust. The gold price in dollar terms is secondary because the gold market is small in comparison to the bond and even equity markets and the fluctuations in all markets are substantial.

    Question: Is the new post 2008 normal temporary backwardation mostly a logistical problem that was not there prior to the credit ciris 2008?

    • monetary says:

      I don’t think short term movements are the focus of Keith’s reporting. The only prediction he’s made is a long term trend towards “permanent backwardation” where gold becomes expensive or unobtainable at any (dollar) price, but on a time scale of years.

  2. steevan16 says:

    Thanks Monetary.

    My expectation was that, just with the intention of tracking the gold basis report from a gold investor’s perspective, an unanticipated abrupt fall of 15% and that too which has barely recovered 5% since the April 15th market bottom means this apparently now stabilising difference of 10% below 1600 average should have been captured to some degree in the report. That’s where I was (and to some extent still am) confused.

    An indicator I am most interested in is when to buy more gold next. Is the market going to slide further as some are anticipating 1100 levels. I have no intention of selling any gold for the foreseeable future and there is no leverage involved. Would like to know what you have to say.

    Not really bothered about looking at gold in terms of dollar price anymore (as Dr.Keith through his videos and writings has convinced me otherwise) but as I am paid in fiat, spending less dollars to buy more gold is always luring, hence my query :-)

    • monetary says:

      I have no idea, really. I barely trust my analytic abilities to make investment decisions for myself, much less recommend what other people should do.

      • steevan16 says:

        So other than relying on the long term trends (10 years may be?), everything else in investing is down to luck?

        And, no offence to any one but this technical analysis is really interesting to me…. First of all the punters cover themselves up by saying TA is right only 60% of the times (that’s a massive error margin to make a stupidest prediction and still defend themselves to be right, isn’t it?) …. and then they draw one arbitrary line through a confused curve which looks like driven by Bernanke’s quarterly drivel (which may not have any relevance to the reality) and they try to give a meaning to it. It looks like all farce to me…. at least to an untrained eye.

  3. monetary says:

    I have no idea, really. I barely trust my analytic abilities to make investment decisions for myself, much less recommend what other people should do.

    In the context of the basis report, it’s interesting to note this piece that just appeared on ZH: http://www.zerohedge.com/news/2013-05-13/speculator-gold-gross-shorts-all-time-highs

    The most recent diverging peak in the gold basis / cobasis chart (https://monetary-metals.com/wp-content/uploads/2013/05/Letter-May-12-Gold.png) actually precedes an unprecedented shorting of gold futures… if the ZH data is to be believed, short positions in gold futures have gone from normal levels to a 14 year high just in the course of today’s trading.

    Also interesting is the historical perspective: backwardation appeared on April 3 (for the June contracts), whereas in the past reports it’s happened a bit later in the month (Feb 13 for May: https://monetary-metals.com/wp-content/uploads/2013/03/Letter-Mar-8-Gold.png).

    My own local data shows premiums on 1oz coins hit a 31 day low on May 9, 2.6% lower than a high of 4.5% on April 16… but with no clear trend visible.

  4. monetary says:

    It looks like including external URLs ends in comments getting stuck in moderation, so here’s my post without:

    In the context of the basis report, it’s interesting to note this piece that just appeared on ZH: …

    The most recent diverging peak in the gold basis / cobasis chart (https://monetary-metals.com/wp-content/uploads/2013/05/Letter-May-12-Gold.png) actually precedes an unprecedented shorting of gold futures… if the ZH data is to be believed, short positions in gold futures have gone from normal levels to a 14 year high just in the course of today’s trading.

    Also interesting is the historical perspective: backwardation appeared on April 3 (for the June contracts), whereas in the past reports it’s happened a bit later in the month (Feb 13 for May: https://monetary-metals.com/wp-content/uploads/2013/03/Letter-Mar-8-Gold.png).

    My own local data shows premiums on 1oz coins hit a 31 day low on May 9, 2.6% lower than a high of 4.5% on April 16… but with no clear trend visible.

  5. monetary says:

    It looks like including external URLs ends in comments getting stuck in moderation, so here’s my post without:

    In the context of the basis report, it’s interesting to note this piece that just appeared on ZH: …

    The most recent diverging peak in the gold basis / cobasis chart actually precedes an unprecedented shorting of gold futures… if the ZH data is to be believed, short positions in gold futures have gone from normal levels to a 14 year high just in the course of today’s trading.

    Also interesting is the historical perspective: backwardation appeared on April 3 (for the June contracts), whereas in the past reports it’s happened a bit later in the month (Feb 13 for May). Unfortunately these are the only two data points available… not much to go on.

    My own local data shows premiums on 1oz coins hit a 31 day low on May 9, 2.6% lower than a high of 4.5% on April 16… but with no clear trend visible.

  6. Keith Weiner says:

    steevan: as I wrote in another article, no, we did not call that drop nor did anyone else that I am aware of other than the permabears and a few technical analysts. What the basis does show is that selling of physical occurred in large volume. Gold went out of its temporary backwardation temporarily around the 15th of April.

    What we did call is the rising gold:silver ratio, against the calls of virtually everyone else. A rising ratio (i.e. silver is getting cheaper in gold terms) generally, but not necessarily, occurs when the dollar prices of both metals are falling.

    At this point, August gold is getting close to backwardation which is interesting especially in light of the “roll” from Jun->Aug which is occurring right now. (Pictures and analysis will be in the next basis report)

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