The “No Taper” announcement has faded. The new temporary obsession is the government shutdown and debt ceiling. Which way is the gold price supposed to go on these news items?
No matter. The gold price ended the week down slightly from last Friday, and the silver price was flat.
We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe is, on net, hoarding or dishoarding.
One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.
Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production can be measured in months. The world just does not keep much inventory in wheat or oil.
With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.
Here is the graph of the metals’ prices.
The Prices of Gold and Silver
For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide terse commentary. The dollar will be represented in green, the basis in blue and cobasis in red.
Here is the gold graph.
The Gold Basis and Cobasis and the Dollar Price
The dollar moved around, but ended where it started. The cobasis rose a bit, indicating either that the market got a bit tighter or else that the inexorable pull of temporary backwardation is starting to tug on the December contract (we suspect a bit of both but mostly the latter).
When speculators are driving a move, then the cobasis tracks along with the dollar price. That is, as the dollar moves higher / the gold price moves lower, then gold becomes more scarce. And the opposite is true also; gold becomes more abundant when speculators bid up its price.
And this is what we saw again this week (though not from late August until now).
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
It is notable that there is no trend in the cobasis, as the dollar rises, though the cobasis did track the price move in the latter part of the week.
The Ratio of the Gold Price to the Silver Price
As the gold price fell and the silver price held steady, the the ratio of the gold price to the silver price fell.