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.
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.
Here is the basis chart for July silver. Unlike gold, it showed a decrease in scarcity on Friday.
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.
© 2013 Monetary Metals