Monetary Metals Supply and Demand Report: May 26, 2013

On the week, the gold price went up about $30. Silver was up $0.11. The gold bugs may be wondering if it’s safe to come out now. One recurrent theme of ours is that it is exceedingly difficult to trade gold against the US dollar. Without leverage, it’s not possible to make a profit in objective money. With leverage, if April 12-15 happens, you will take a beating. There are better times and worse times to be long gold or silver with leverage, but not when silver looks set to outperform (our call since Jan 23). Typically, though not necessarily, gold outperformance when the price of both metals falls. The silver price falls more than the gold price.

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

 Gold and Silver Price

Letter May 26 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 June gold basis had some volatility, though we can see a clearer signal in the August trace. As we are now close to the end of the contract “roll”, when naked longs must sell June and buy August, this report will not show June gold after today. In August, we see a steady fall in the basis, and a steady rise in the cobasis. These trends go back at least to January. Gold is becoming scarcer in the market. August remains in a slight backwardation. All else being equal, when the massive buying pressure in August (due to the aforementioned roll) comes to an end, we will see the August cobasis rising.

Gold Basis and Cobasis

Letter May 26 Gold

Here is the basis chart for July silver. It shows considerably more volatility than gold, though a generally rising cobasis after April.

Silver Basis and Cobasis

Letter May 26 Silver

Here is the graph showing the ratio of gold to silver. It moved up this week. 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. Should something precipitous occur in Japan, this ratio could spike to an astonishing height. Last Sunday evening, the ratio briefly spiked to about 67. There is no reason this could not happen in broad daylight (though this is not a prediction).

Gold to Silver Ratio

 Letter May 26 Ratio

8 replies
  1. eugenioca says:

    Hi Mr. Weiner,
    which is in Your opinion the best theory (and practice) book about basis trading?
    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?

  2. Keith Weiner says:

    eugenioca: If by basis trading you mean when to enter long or short, I am not aware of any books or much published material at all (other than the work of Antal Fekete and of course my work on this site). As to historical data, it is very hard to come by because one needs contemporaneous bids and asks. Historical (cleared) prices are not sufficient. I do not believe there was backwardation in gold prior to Dec 2008. Since then it is the “new normal”.

    petter: Here is what I wrote to someone who asked a similar question in the comments for last week’s basis report:

    “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.”

    I haven’t pulled up all of my data, but yes I do think 55 days is either a record or fairly close.

  3. monetary says:

    In other news, physical gold is now selling at $1950/oz… at least, that’s what the US Mint is pricing 1/10oz coins at. With a cap on production of 20,000 coins.

      • Keith Weiner says:

        Also, that’s 1/10 oz coins, not bullion. The premium reflects demand for that small-sized coin in the context of inelastic manufacturing capacity.

        I would like someone to show me where I can sell big bars at $1900 an ounce, or even 1 ounce bullion coins such as Eagles or Krugerrands.

  4. steevan16 says:


    You are not a proponent of the quantity money theory from what I read, so printing new dollars need not propel gold proportionately. Is this theory valid between currencies too?

    For example, if new dollars are printed tomorrow, the rupee value against the dollar need not go up when no rupees are printed in that epoch?

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