Monetary Metals Supply and Demand Report: 1 Mar, 2015

One almost gets the sense that a significant event is going to happen soon. The wisdom of our old friend Gandalf has been paraphrased a number of times in this Report. To quote from him again (not paraphrasing at all this time), “Tt’s the deep breath before the plunge.”

We don’t necessarily mean a plunge in the price of gold measured in dollars. It could be a plunge in the price of the dollar. And there many other currencies that look ready to plunge. For that matter, the dollar is currently 25.6mg gold. There is no reason it couldn’t be 16mg again, as it was in 2011.

Others are looking for it too, some in all the wrong places. Such as an absurd claim, floating around this week about Apple. One version of their new Watch is made out of gold metal. The claim is that Apple is buying a third of the world’s gold. “Hold on to your gold, boys and girls, because gold’s gonna go up!” Well, except for the fact that the stocks of gold have been accumulating for at least 5000 years. All of that vast stockpile is potential supply. Apple cannot make a dent in that.

For a real picture of the supply and demand fundamentals of gold and silver, read on…

First, here is the graph of the metals’ prices.

The Prices of Gold and Silver
letter mar 1 prices

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, on net, is 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 (stocks to flows) 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, and under the right conditions. 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.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved down this week.

The Ratio of the Gold Price to the Silver Price
letter mar 1 ratio

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 mar 1 gold

Gold bulls will be excited to see that even though the price was up $11 (i.e. the dollar was down about ¼ mg), the cobasis (scarcity) rose. The April gold contract is now in backwardation. A very slight backwardation.

Our calculated fundamental price of gold was unchanged this week. It’s still about $50 over the current market price.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter mar 1 silver

The price of silver went up 33 cents, and whatddya know, the cobasis (scarcity) rose big-time. This pattern also occurs in farther-out contracts, if with a bit less magnitude.

Perhaps the small savers in Greece (where a bank run appears to be happening), or Ukraine (where the currency is in outright collapse, or any number of other countries have decided it’s better to hold money than government debt paper. And perhaps silver is affordable to them but gold is too expensive. Whatever the reason, a small and potentially significant shift in the fundamentals has occurred in silver.

That said, silver speculators should not get too excited yet. Although we calculate a fundamental price 50 cents higher than we did last week, it’s still more than a buck fifty below the market price.

Perhaps the fundamentals will continue to tighten. However that’s not a bet we would recommend just yet.


© 2015 Monetary Metals

11 replies
  1. Bob says:

    I am certainly going to celebrate when the silver fundamental price finally rises above market price! It is just so difficult for me to believe the god’s (pathogen killing) gift to mankind element can be valued so low for so long. I think of all pathogens engulfing those paper debt FRNs that circulate, just disgusting! I can’t help but think silver was created to be perfect pocket money. If we could only stick to the wisdom imbedded in our constitution. How many books did Jefferson read to become so impressively educated and wise?

    Thank you much for this info!

    • RD says:

      If several additional hundreds of tons of physical gold purchase would not add a single once of strain to the gold market, why are you losing your time with this gold basis story ?

        • RD says:

          What I said is just it is obvious that if apple would buy such quantity of gold (everything else being equaled regarding gold purchase ie nobody would deferred or canceled gold purchase in order to buy this gold iPhone), it would not change dramaticaly the global gold market.

          But, it does not mean that such increasing physical buying pressure, would not increase the physical demand/supply equilibrium for a given fiat equilibrium price.

          Indeed, if gold was such plentiful (at these fiat level exchange) and if a potential new big physical gold buyer would have not importance, it would be useless at this stage to follow the gold basis as there would be permanent strong contago.

          PS : sorry, English is not my primary langage and I have big difficulties in order to transcribe nuances into my comments but I hope you will get what I generally mean…

          • opusnz says:

            RD, I knew exactly what you meant so don’t feel bad.

            While I am getting used to it (I am a slow learner) I think some of the attempts at irony or satire are too cryptic and only muddle the message. For those who live and breathe gold it makes perfect sense but for those trying to learn it can make you feel like you are at a Star Trek convention and everyone is speaking Klingon.

  2. RD says:


    Not sure to have rightfully undertsood your post, still due to my poor English sorry.

    The gold basis “believers” seem to be very sarcastic (or more) on other gold “promoters” and between themselves : it is maybe the time to team up with dan norcini and martin armstrong !

    Besides, I remember years ago fekete stating that the gold basis cannot be manipulated contrary to the gold price, but I did not remember what was the irrefutable evidence of this statement (maybe because I missed them I agree). Indeed, suppose for the sake of the mind, that deliveries would be “forbidden” (just a theorical problem !) in the comex : would it change the relative values of the future contracts ?

    Would it be possible that gold basis results would be a little different in non US markets such shanghai (in Mainland or in the free trade zone) ? If yes, is it meaningful for the theory ?

    Yes I know are surely just a few stupid useless questions as the basis oracle is omniscient…

  3. Keith Weiner says:

    RD: If Apple buys a few hundred tons, that might affect the price of gold. Especially if there were no corresponding selling of gold (e.g. someone sells gold jewelry to buy an Apple Watch which is basically gold jewelry). That is different from my point in this Report. A few hundred tons is *NOT* a third of the world’s gold. The official estimates (which I believe are understated) are 170,000 tonnes.

    It might also affect the basis. As you note, if the only change at the margin is a new buyer of a few hundred tons, then gold metal becomes scarcer. At least until the price rises.

    I try not to be sarcastic, and at the same time point out the economic nonsense (e.g. Apple is buying 1/3 of the world’s gold) and the self-serving promotion. I think this is a matter of integrity. Whether you agree with the basis theory (which is really just an arbitrage theory of markets).

    How would one go about trying to manipulate the basis? If the market wants gold metal, selling futures will only push deeper into backwardation. The only thing central banks could do is sell gold bars. I would not regard that as “manipulating the basis” so much as squandering the national provenance, spending the treasure that belongs to their people.

    I will ask you also to please not be sarcastic. :)

    • RD says:

      Regarding apple, of course 1/3 annual gold production is not at all equal of 1/3 of Worth gold.

      Sarcastic issue : well, monetary metals have enough ennemies in the west without increasing their rank Inside the non homogenous gold “community”.

      Basis : central gold leasing (even in “secret” from its owner ie citizens) is not a basis manipulation theory per se in my opinion. But, to prevent some deliveries in the comex for example is one in my opinion. There are some rumours about that, I personaly have no information to confirm this or not. But, if it happens to be true, it would be a basis comex manipulation in my opinion.

  4. pchapuis says:

    Months of religiously reading these posts and I still struggle to understand. I do get the general idea, so I keep reading. =)
    Do you think that the day we get this “backwardation” we are looking for, that there will actually be physical gold available to buy for the average man on the street?
    I am self taught and have no formal schooling in economics…..but something seems amiss, could the price of gold in dollar terms plummet on the paper market while no physical gold be available to exchange our fiat currency with at my local coin shop?

  5. bronsuchecki says:

    My thoughts on can the basis be manipulated

    “Now your retort may be that the fact that the trusting investor was willing to accept fake unallocated allowed the manipulation of the basis to turn backwardation into contango. You would be correct, and that is the point of my scenario. The basis is therefore reflecting reality, the reality that there are idiots prepared to accept paper gold.”

    More at the link.

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