This was another short week, with Monday a bank holiday in the UK.
Through Tuesday, the prices of the metals seemed to want to hold onto the increase that was sparked by an unemployment report. It wasn’t until Wednesday that the prices began to sag, almost but not quite to the pre-unemployment report levels again by Friday.
We are not going to lament the folly of man nor trader. We are not even going to comment on the accuracy, or lack thereof, of the unemployment data. We are simply interested in the evolving dynamic between the fundamental setters of the prices of the monetary metals and the speculators who are trying to front run them.
First, here is the graph of the metals’ 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, 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.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio moved up this week, ending about 67.4.
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 dollar is up slightly, to over 24mg. The cobasis is up slightly.
We have previously discussed the extraordinarily high level of the gold cobasis across all contracts. It is not in backwardation, but it’s new and different in the post-2008 world to see such a high cobasis (around -0.1%) so far out from the present date. This is evidence of a tight gold market, and suggestive that the price could go higher.
What is interesting to note is that we are in the midst of the contract roll. Those who are long gold are selling their June contracts and if they want to remain long gold they can buy August or a farther month. There is a famous scene in a Sherlock Holmes story, where the dog does not bark in the night (which proves the criminal was known to the dog).
This is the contract roll, which seems not to be able to shove the June cobasis over the zero line. The market is tight but perhaps not that tight.
Now let’s look at silver.
The cobasis fell as the dollar fell (i.e. silver price rose), showing the move was speculative. It ended the week slightly higher than it ended last week. Not only is the silver cobasis four times lower than gold’s, but the next month is almost twice lower than that. Gold may be tight, but silver not so much.
We saw one headline on Friday that silver is in backwardation. Not from where we sit, though the July basis is negative. Our definition of backwardation is strict: when one can sell metal in the spot market (bid) for more than one can buy it in the futures market (ask). This is because we are looking for an actionable trade—to decarry.
There is no profit in decarrying silver today. We promise to bellow from the rooftops when, once again, there is.
Keith wrote an article for Forbes that those interested in gold and silver may enjoy, Why Did Both Silver and Gold Become Money?
© 2014 Monetary Metals