Monetary Metals Supply and Demand Report: 17 Nov, 2013

The gold price dropped and recovered, ending basically unchanged. The silver price dropped but didn’t bounce the way gold did, ending down 72 cents. As always, we want to know: what are the fundamentals? The speculators can run for a while in either direction, but reality will inexorably pull the price back in line sooner [...]

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7 replies
  1. Freeman says:

    I am finally getting the hang of thinking in terms of basis and cobasis, but need a bit more help understanding why the collapse of the yen or rupee would cause a crash in PM price. Is it because the subject population would seek shelter in the USD? One would think all available gold and silver would be absorbed first then a run to other fiat currencies. A little help, please. Still adjusting to money vs currency thinking.

  2. RZ says:

    I also wonder why a rupee collapse would trigger a dollar gold price collapse, since it is not a component of the usdx. Unless the usd demand from rupee refugees is greater than their demand for gold (which is probable).

  3. Keith Weiner says:

    Thanks for your comments.

    It’s a good question about rupee collapse and the gold price in USD. One of the major themes I emphasize in my writing is that we live in a world dominated by credit, most of it counterfeit. People (especially big banks, but also hedge funds, pension funds, private equity groups, you name it) borrow to speculate. Why? There’s little to no yield in the traditional investments that have low risk, such as Treasury bonds (I won’t even go into how much is wrong with defining the government bond as “risk free”!) There is even borrowing to lend, i.e. buying bonds on margin. There are bond futures. Etc.

    It varies in different parts of the world, but the leverage ratio of major financial players ranges from at least 10:1 to in some cases more than 30:1.

    What happens when a major currency begins to collapse? The first issue that comes to mind is that any financial institution which has net exposure to the currency begins to take losses. This puts their balance sheet under stress. One challenge is that they may not have liquid rupees in an account, but illiquid assets denominated in rupees, such as mortgages. Every tick downward of the rupee causes more pain. The mortgages are illiquid in a good market, and in a collapsing rupee environment you can be sure that the bid will collapse if not disappear.

    This is not a situation where you bought gold for cash, the price is falling, and you’re having a “calm” discussion with your distraught spouse at the dinner table. This is a situation where you see the losses on the screen, and you get a phone call politely asking for more margin. And perhaps another and another.

    You have to liquidate something. You and all the other financial institutions who are in the same boat. You can’t easily liquidate the assets which are the primary source of the pain. You need something which has a bid-ask spread that is not subject to “Bid Dropitis”. Gold and silver…

    Of course, the speculators understand this and they front-run the trade.

    While this is happening, there are other dynamics playing out. One of them is that affected depositors are watching as well. It takes more to motivate a citizen to move money out of his own currency and banking system than it does a day trader to close a losing position. But at some point, many will take that step. What do you do, if you have significant wealth in rupees, and the rupee is collapsing before your eyes? If you do nothing, you will be wiped out. There are two logical places to go: the USD and gold.

    • petter_w says:

      Is it correct to say under this scenario that the final nail in the coffin for the monetary system is a default by the US gov – in other words – interest rates skyrocket – the bond values crash along with the dollar backed by the defaulting bonds? Do you have any timefra for this?

  4. Greg Jaxon says:

    “What do you do, if you have significant wealth in rupees, and the rupee is collapsing before your eyes? If you do nothing, you will be wiped out. There are two logical places to go: the USD and gold.”

    To which you can add that India recently shut down their over-the-counter gold import channels.

    Nearly all the “global currency collapse” theories I’ve seen after 2008, identify the USD as the last line of support for irredeemable currency. Of course the “global currency consolidation” theories do essentially the same thing. The resolution of that debate could come in the kind of “interesting times” we seem destined to live through soon. But Menger’s theory about the nature (evolution) of money is borne out in various economic stories week by week. I especially noticed the 10x jump in the 1mo T-Bill spreads that briefly “demonitized” them just hours before the theatrical US Gov’t shutdown was called off. And a week ago Andrew Huszar confessed what Fekete et al have claimed about QE in an article now widely reprinted.

    Although my anxiety about any upcoming turmoil remains intact, thanks to these clear theories and sites like Keith’s that track the story as it unfolds, I have much less fear of the unknown than before, when the winds of pure propaganda kept blowing me into one dead end investment after another.

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