Monetary Metals Supply and Demand Report: 1 Dec, 2013

Let’s consider speculation and arbitrage, and look at what it really means when the cobasis is deeply negative, in that light. This is the case in silver. Per the definition of cobasis = Spot(bid) – Future(ask), it means either that physical metal is being dumped on the bid, pressing it down, or that people are [...]



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6 replies
  1. Thefroggydude says:

    How do you define “physical” metal? Are you referring to metal that you own and physically possess plus all allocated deposits? Or do you use the trader’s definition of physical that includes the above plus unallocated accounts at bullion banks?

  2. Keith Weiner says:

    Thanks for the comments.

    Nico: Leasing of both monetary metals occurs all the time in normal markets. We’re looking for an explanation of silver’s low cobasis in light of falling prices.

    froggy: All of the above, so long as the net result is the dumping of 1000 ounce bars onto the bid.

    It’s interesting to see the conspiracy theories trotted out again. Most people do not want to acknowledge an arbitrage theory of the metals markets and openly scoff when it’s presented to them. And yet there is such a theory and that theory predicted today’s big drop in the silver price. And their response?

    Has to be the Illuminati. Gotta be. Ain’t no other conceivable explanation! 🙂

  3. Thefroggydude says:

    The part that I struggle with is that “if” bullion bank unallocated accounts are fractionally reserved as one would expect from any and all bank lending then sales of unallocated gold would not be equivalent to “dumping 1000 oz bars” on the market yet it would appear to be so in your cobasis analysis would it not?

  4. Keith Weiner says:

    froggy: No, the cobasis comes from the bid the bid in the spot market. If a bank has silver receivables in an unallocated account, and a client liquidates his account, then the bank will sell the silver receivables. That won’t press this bid.

    Btw, for a long time starting at least in 2010, there was a major backwardation in silver and a cobasis curve inversion (longer dated contracts had a higher cobasis). I suspect this was due to duration mismatch by the bullion banks, i.e. lending deposits for longer than the term of the deposit, such as lending for a year a demand deposit. When people began asking for their metal, the banks were not naked short the metal but they were mismatched. This drove the cobasis wild and the price from around $16 to $49 before it has now all but reverted to where it was.

  5. fiat124 says:

    Keith, thanks from all the non-professionals for taking the time and effort to explain this to all of us.

    Quick question about pricing dollars in gold. 1oz of gold at $31050 would be 1US$ = 1mg, correct? If gold were to go up to $50k/oz as some are predicting, how would you price dollars in gold? mcg?

    Thanks!

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