In this shortened week (Easter Monday), the price of gold ended up $6 higher but it wasn’t flat. The price was sagging Wednesday and Thursday and shot back up on Friday. The price of silver followed the same trajectory but didn’t bounce back as far, so interestingly, the gold to silver ratio rose all days except Friday.
This means the price of silver fell, measured in gold terms. Regular readers may note that we never say gold or silver rose or fell. We are always careful to say the prices, as measured in dollars. Well here is a clear cut case when we can say that silver fell. It went from 434mg gold to 424mg, or -10mg.
What caused the prices to jump early on Friday? Zero Hedge attributes it to the March Indian gold import number, doubled from February. Accuse us of not “getting it”, but that doesn’t sound like the best reason to buy gold and silver futures.
The silver price spiked up 30 cents on the news about gold imports. Got that?
The actual picture of supply and demand cannot be cobbled together from such isolated data points, rumors, etc. Read on…
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, 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 up further this week.
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 brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.
Here is the gold graph.
The dollar fell (i.e. price of gold rose) and at the same time, the cobasis (i.e. scarcity) rose as well. However, neither was a big move. We have backwardation in the June contract, but not a lot. It’s less than 0.03%. Granted, it shouldn’t happen at all but at the moment it’s pennies.
Now let’s look at silver.
We switched from May to July, as the May contract is under heavy selling pressure due to the impending First Notice Day, when traders have to sell the contract lest they be obligated to take delivery and pay for the real metal. For comparison, the May cobasis rose from 0.2% to well over 1%. This is noise, not signal.
In any case, the cobasis rose but this is what we would expect with a price decline—selling was concentrated in the futures market. As the price fell, the metal became a bit scarcer. Look at that correlation between the green line (i.e. price of the dollar in silver, the inverse of the silver price) and the red line (i.e. scarcity of silver). It’s uncanny since mid-February.
As with gold, we see little change to the fundamentals. Notwithstanding that apparently India imported twice as much in March as it did in Feburary. And notwithstanding predictions of more QE.
A pilot friend of Keith’s once shared his experience of flying. “Hours and hours of boredom, punctuated by brief periods of stark terror.” It’s an apropos metaphor for the markets for the monetary metals. We are in a boring phase.
© 2015 Monetary Metals