Measured in gold, the dollar fell about 0.4mg, to 24.36mg. In silver, the action was more dramatic, with a 60mg loss, to 1580mg silver. What happened this week? The stock market, perhaps, began to roll over. The euro was down a copper-clad zinc penny, from $1.36 last week to $1.35 on Friday.
Whatever the news, we want to know if it was speculation yet again, or fundamentals, driving the move. 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, 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 down again 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 terse commentary. The dollar will be represented in green, the basis in blue and cobasis in red.
Here is the gold graph.
What a bummer. The cobasis is falling with the falling dollar. Oh well, the dollar isn’t going to 6.2mg next week (i.e. gold isn’t going to $5000).
Now let’s look at silver.
I remind readers that the July contract is nearing expiration, and so traders are “rolling” their positions to September or December. This means they are selling July, which should be pressuring it to go into backwardation. In spite of this pressure, the cobasis is falling. The dollar isn’t going to 0.12g silver next week (i.e. silver isn’t going to $250).
In farther out months, the cobasis has been collapsing, with a rising basis as well.
The market price of silver closed on Friday at $19.67. If you take out the component due to speculation, you get a number well under $17.50. This is not a timing indicator and certainly not a call to go out and short silver (if you do want to short a monetary metal, NEVER DO IT NAKED—always hedge!)
© 2014 Monetary Metals