We have been bearish on silver in terms of its price measured in objective money—gold—for a long time. We have also expressed bearish opinions on silver as measured in terms of the US dollar.

The current trend began on April 26, 2011. This was when the speculative silver bubble burst. On Monday April 25, the intraday high price was $49.83 but the price was $46.90 at the close. That’s almost $3. The price flitted around near the high for a few more days. But then the following Monday, it began to collapse. It closed that week at $35.58. Here’s a graph.

The Price of Silver Apr-May 2011

Since then, the trend has been down. The silver price in dollar terms is near its multiyear low. The same is true for its price in gold. Here is a graph from April 1, 2011. Both measures of the silver price look quite similar.

The Price of Silver in USD and Gold, Apr 2011 – Aug 2014

This week, the price of gold declined $5, and the price of silver fell $0.32. This occurred despite a price blip on Monday. Monday’s price action may have had something to do with two high-profile articles published that day promoting the profits to be had if one invests in speculates on silver.

There have been many zigs and zags to the silver price, even since its fundamentals got sharply weaker about a year ago. We suspect that the countertrend zigs are sometimes due to such promotions, and some are certainly due to Fed and unemployment announcements, as we have been documenting. The fundamentals will win in the end.

In gold, virtually all of the metal that has been mined for thousands of years is still in human hands. In silver, it’s a smaller percentage but still many decades of production at current mine output rates. Weakening fundamentals means that there are fewer buyers and more sellers of metal. Every price blip caused by the buying of futures encourages more sellers and discourages would-be buyers.

The fundamentals are definitely winning in silver.

To see a picture of the supply and demand fundamentals, read on…

First, 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.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio rose this week, from 65.86 to 66.76, or 1.4%.

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 Gold Basis and Cobasis and the Dollar Price

The cobasis (i.e. scarcity) and the dollar price (i.e. inverse of the gold price measured in dollars) continued their tight correlation for another week. Prices moves continue to be driven by speculators repositioning themselves.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

We have shifted from the September to the December contract, as the contract “roll” (i.e. when silver speculators must sell their September contracts before First Notice Day and buy December or another farther-out contract if they wish to remain long) is well under way, and making the September basis volatile.

In silver, we have the same story as with gold. The difference is that the absolute level of the cobasis is -0.89% (vs. -0.25% for the December gold cobasis).

Don’t be misled by the scales of the dollar price and the scale of the cobasis. On June 12, the dollar was 1.6g and the cobasis was -0.8877%. The dollar dropped and rose again. Now the dollar is 1.59g and the cobasis is -0.8876%.

This is a perfect picture of speculators’ repositioning. As they sell futures, silver becomes scarcer in the market. As they buy futures, silver becomes more abundant again. After two months of back and forth, the market is back to the same state.

 

© 2014 Monetary Metals