Monetary Metals Supply and Demand Report: 06 Oct, 2013

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

Letter Oct 6 prices

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

Letter Oct 6 gold

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

Letter Oct 6 silver

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

Letter Oct 6 ratio

As the gold price fell and the silver price held steady, the the ratio of the gold price to the silver price fell.

8 replies
  1. Richard Besner says:

    Hello Mr. Keith Weiner ,
    I appreciate your website and do study the charts every time I get them.
    I understand that you say that Gold and Silver prices are based on supply and demand and not on market news. However I have read several times your multiply page explanation about it all the Monetary Metals Supply and Demand and Basis and Cobasis and found it to be very confusing although I am sure it is true.
    Would it be possible to add a paragraph to both Gold and Silver for the layperson explaining possible price direction based on the status of the chart.
    i.e. The prices of both metals over the short term are likely to move sideways as both cobasis are below Zero????

  2. bleubelle says:

    Keith ,

    How often should the basis and co-basis be tracked? Is it a daily or weekly consideration?

    According to this report, do you believe that December will slide into backwardation because the gold basis and co basis did not climb above zero? I am trying to make sure I am understanding your theory.


    Great report, as always.

  3. jamesgl says:

    Hello Keith,
    I would like to echo The 3 requests above for a short sentence or paragraph indicating the probable direction of the metals based upon basis-co-basis charts that you kindly compile!

    Please keep up the excellent work! Your analysis makes enormous sense to me.


  4. Keith Weiner says:

    Thanks for your comments and questions.

    Richard: What the basis is showing is the tightness or looseness of physical metal to to the market. A high and rising basis means supply is abundant. A high and rising cobasis means supply is scarce.

    If the bases change significantly, but the price has not yet changed, it suggests that it is likely that the price will change correspondingly (e.g. a higher price if the market gets tighter). What makes it interesting (and challenging) especially in the short term is that speculators can drive the price all over the map. For example, I keep writing about the Fed “no taper” announcement in September and the reaction by speculators to drive the prices up very far very quickly. No commentator that I read expected this announcement. And even if you knew they would say this, there was no guarantee that traders would buy so heavily like that.

    Such events do sometimes give us great tradable opportunities: to bet that the move will quickly reverse. So every we have chronicled 4 or 6 of them in the past 8 months. The price has reverted in every case so far, within minutes in at least one case (I am going from memory—the articles are on the site if you want to read up on what we said and when). The “no taper” move occurred on a Wednesday. The price was flat on Thursday. And Friday is when the reversion mostly occurred (it continued into the following Monday).

    But to get to your question, it is often not possible to predict the price over the short term. Sometimes there is an obvious setup. Sometimes there is a big, long-term move brewing (as right now: gold will likely outperform silver significantly). Often the best move is no move, at least if you’re trading.

    bleubelle: We track it throughout the day. If you look at our graphs, you’ll notice there is one data point per day. This makes the graph clear and easy to read. This free Report is published weekly. We are working on developing a subscription service. It won’t necessarily be published more often, but it will have timely updates when big moves occur. And it will provide specific trade recommendations.

  5. brpaul says:

    “How often should the basis and co-basis be tracked? ”
    From this report, I would say:
    1) it is sufficient to track it daily, in order to draw the basis
    2) the trend in the basis should be analyzed weekly in order to decide investment positions, not daily or intraday, because of the temporary moves by big investors
    3) the term (time horizon) of each new investment position is not discussed here, and for sure a matter of your own strategy. Basically, what is the maximum % of hoarding (or dishoarding) flow you want to consider ?


  6. streber says:

    Why the terms basis & cobasis?

    In the grain mkts it’s just “basis”

    Say DEC corn is $5.oo (Chicago futures)

    If the Iowa elevator is offering $4.80 that’s a 20 cent negative basis (they don’t want more corn)

    If the elevator is offering $5.20 that 20 cent positive basis (they want corn)

    Anyway, that’s the how farmers talk basis…neg or pos
    It is almost always negative (under futures)
    I have seen it neg 50 cents (they really don’t want more corn)

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