Monetary Metals Supply and Demand Report: May 19, 2013



The dollar gained 1.4g gold this week, which means gold price in dollars went down $88. This is another big move that will give a false sense of confidence to the Keynesians and Monetarists (one of the business news sites was crowing this week that “Keynes has won”). They are wrong. The strengthening dollar is not a sign of anything good (look for an article about this, to be posted soon). The gold bugs have been cheated again this week.

Here is the graph showing the prices of the metals in dollar terms.

Letter May 19 Price

Lots of places provide a graph of the price action. This report is about the basis. 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. One must look at the basis (see here for a basic explanation). Think of the basis as a scarcity indicator. Since gold and silver have huge inventories that are not consumed—they are held for monetary purposes—a sign of scarcity in the market is a sign that the dollar is moving towards collapse, when gold will no longer bid on it.

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 does the falling gold price mean? It means the dollar is getting more valuable. Why? We will soon publish an article presenting our theory (in short, the monetary system depends on credit expansion and credit is contracting).

No, the gold “bull market” is not over. We do not recommend that anyone sell his gold now, unless he is using leverage (and we don’t recommend using leverage). When the gold price rises, we don’t recommend selling then, either. A rising gold price gives only an illusion of profit (and the tax man will take a big piece of that).

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. Both June and August are shown, as the June contract is fast approaching First Notice Day. Contract holders are now “rolling” the contract. They sell the June contract and if they wish to remain long gold, they buy August.

The August contract entered backwardation on Thursday. This is significant because this is occurring against the crowd who is buying August for the roll. Buying pushes up the offer, and the cobasis is Spot(bid) – Future(offer). The August cobasis should be falling right now, just from the mechanics of the roll. It is doing the opposite. The scarcity of gold is rising.

Letter May 19 Gold

Here is the basis chart for July silver. Unlike gold, it showed a decrease in scarcity on Friday.

Letter May 19 Silver

Here is the graph showing the ratio of gold to silver. It moved sideways this week, though we reiterate that we are cautious about the price of silver (measured in grams of gold) and think the ratio is more likely to rise than to fall.


Letter May 19 Ratio



© 2013 Monetary Metals

13 replies
  1. jmf says:

    It looks like they are trying to smash the price again to stop the basis widening. How ironic they cannot see that their actions will only increase the gap. They have themselves become fools in their own ‘greater fool’ game.

  2. petter_w says:

    Basis blow of in gold and silver!

    The gold basis/cobasis curves for june look like a self feeding schockwave that must either collapse because the dollar collapses – or – it collapses or corrects as a result of higher prices. I think for example if gold would go to 2000$ over a few weeks that we would not see this strong backwardation. However – this would only be temporary.
    We sure live in interesting times.

    Is the cobasis positive in silver also for the next future month?

  3. monetary says:

    Oddly enough 1/10 oz gold coins — from any mint — have become tougher to get recently, as many of the usual dealers in my area say they’re “out” and post prices 4% over those of the dealers that have them.

  4. monetary says:

    Wait… isn’t the August backwardation a month early? The June backwardation didn’t happen until April 3, two months before June. The August backwardation happened around May 10, almost three months before August.

  5. Keith Weiner says:

    Thanks for your comments.

    jmf: I would doubt that central bank would be thinking about the gold basis.

    petter: June gold is just what I call “temporary backwardation”. September silver is not in backwardation, though it’s not that far from it.

    monetary: You are spot on to look at when a contract goes into backwardation. I do think it is significant that August entered earlier in the cycle than did June. Here are the dates:
    – Apr first backwardated Feb 15, 30 trading days before April 1
    – Jun first backwardated Apr 4, 42 trading days before June 1
    – Aug first backwardated May 16, 55 trading days before Aug 1

    All else being equal, this is a bullish sign because gold is becoming scarcer and scarcer.

  6. thinkpeace says:

    When ever I read your blog or view your videos Keith, I end up buy an ounce or two of my favorite American Gold Buffalos!

    Curiously, do you consider Silver a monetary metal?

    Thanks for the insights!

  7. eugenioca says:

    Another question,
    are somewhere avalaible historical gold and silver basis and cobasis charts? Is it possible to find the highest cobasis and the lowest basis mark for every contract, going back in time, possibly till 1999?

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