The gold and silver prices recovered about half their drop the previous week, ten bucks in gold and 21 cents in silver. Is this the blastoff of the metals, long heralded in song and hoped-for by goldbug blogs? Read on, and we promise no Obi Wan Kenobe imitations this time…
Here is the graph of the metals’ prices.
The Prices of Gold and Silver
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.
Here is a graph of the ratio of the gold price to the silver price. This shows how many ounces of silver one needs, to buy an ounce of gold. The ratio fell by a hair.
The Ratio of the Gold Price to the Silver Price
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 February cobasis is still backwardated.
The Gold Basis and Cobasis and the Dollar Price
The correlation between the gold cobasis and the price of the dollar is glaringly obvious. No need to draw lines this week. Not much has changed in the supply and demand of gold. The price hasn’t moved much, but we can see its moves are driven leveraged speculators. Will they bid gold up to $1300 this week or sell it down to $1200? Maybe. They could. This Report is not about speculating on such things. What we are about is looking at a clear picture that few people watch.
The gold market is not as tight today, as it was in early August. The gold price is now $60 to $100 lower. For whatever reasons—rumors and whispers and conspiracy theories aside—this is an observable fact. Maybe more people are willing to sell their gold metal in greater quantities now. Perhaps they are less enthusiastic to buy now. Most are dollar thinkers, and are worrying that “gold is going down.”
I often use the analogy of a Ouja Board. Everyone has a thumb on the movable indicator piece (called the “planchette”) and it seemingly moves where it wants to go. Right now, speculators are looking for a direction that they can bet on to make dollars. They would like to front-run durable demand, that is demand by hoarders. Speculators buy in order to sell, whereas hoarders buy to hold. While the former may move the price at the margin for a time, it is the latter who determine whether gold is in the two hundreds, the two thousands, or the fifty thousands.
Right now, the hoarders are not driving it deeper into scarcity, but nor are they letting it become abundant. So what is the likely next move of the gold price?
You may go on an unexpected journey this week, but keep your wits about you and your trusted friends close.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
The cobasis of silver is higher than last week, unlike gold, but on the other hand it’s at zero compared to gold’s backwardation. If it continues to rise, then we will change our stance on silver. For the moment, we would not want to wager on silver one way or the other. If forced to take a position, we would be bearish. Call it skepticism that such a quick rise in the cobasis after so long at so low a level won’t pull back. Call it a hunch that the final capitulation has occurred in gold, but not yet in silver. We see the comments on websites, and this week there was an interview with Jim Rogers wherein he said he had sold or hedged his gold but was bullish on silver.
We’re not. Not yet.
© 2013 Monetary Metals