Monetary Metals Supply and Demand Report: 19 Oct, 2014
We want to share a thought that has been implicit in many statements in this Report over the last two years. There is no direct or linear connection between the price of gold (or silver) and what we see reported as macroeconomic data, gold mining data, Indian or Chinese imports, jewelry, etc.
By the official estimate, the existing stocks (i.e. inventories) of the metals are vast, and we believe there is much more metal than the official estimate. All of this metal is potential supply, under the right market conditions. Also, virtually everyone on the planet is potential demand, under the right conditions.
Without the basis data, if you’re trying to bet on the prices of the metals—in either direction, long or short—you are trying to guess how sentiments among speculators and hoarders might change. When there is a rising trend, such as 2009-2011, it’s easy to confuse trend (or luck) with smart. When the trend breaks, it’s easy to lose your shirt and your dollars.
No one else, at least among those who respect the monetary metals, consistently expressed bearishness all the way from $34 to $18 in silver. No one else predicted the gold to silver ratio would rise the way it has. From what we read all along, most every blip was called “the breakout” and followed with price targets of $50 or higher.
Were we lucky? It could be argued we were. We have been publicly right in one direction (our data indicated bullishness in silver from summer 2010 through March 2011, a bit prior to the actual price peak, but we weren’t publishing then). We realize many will want to see if we can call the trend change, when the dollar begins to head downwards in a more serious and sustained way. All we will say for now is that we have the right theory, a solid model, great software, and discipline to follow the data.
Now on to our regularly scheduled Report.
Traders who prefer gold as their vehicle for shorting the dollar collected a small reward this week, $15. However, those who prefer silver paid a small penalty, 12¢. Notably, the gold to silver ratio rose over a full point, to 71.8. A few weeks ago, when the ratio hit our previous target of 70, we revised it to 75.
What’s next? 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 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
Last week, we said:
“we may be seeing the early signs of a trend change. While the dollar fell, the cobasis went up. Not a lot, but…”
This week, the dollar fell (i.e. the gold price increased) and the cobasis (i.e. scarcity) fell but it looks like it’s reluctantly being dragged along. Since Oct 3, the dollar has fallen by a milligram but the cobasis is down only a few basis points.
For reference, on Oct 1 the cobasis was at the same level as on Friday but the dollar was half a milligram higher. It’s a little something for gold bulls dollar bears to hope for.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
Silver went down, in gold terms as well as in dollar terms. Unfortunately for silver bulls, the cobasis fell. The drop wasn’t a lot, but any drop when the silver price falls (i.e. dollar price rises) isn’t good if you’re shorting the dollar.
Keith would love to meet readers face to face at The Gold Standard Institute’s event The Gold Standard: Both Good and Necessary, in Manhattan on Nov 1. There hasn’t been a real recovery from the crisis of 2008. The reason is not simply that the Fed has made a particular mistake. The cause of the crisis is the dollar itself. There will not be a recovery until we return to the use of gold as money. Please come to this talk to hear his diagnosis of the dollar and urgent prescription for gold.
© 2014 Monetary Metals
Hard to read your report with some quotation marks in the middle of it.
I am having this same problem.
Insightful as always!
You should know well that Comex are trading “papers gold”(like some dilutable shares) rather than real Gold. Comex have too little delivery activities.
Recommend you to analyse Shanghai Gold Exchange board
your analysis and thesis are right, but your fundamentals aren’t. in other word, you are analyzing “paper gold” in a broken system.
Thanks for your comments.
Rabo: From your comment, I am guessing you think that COMEX is manipulated by a conspiracy. I have written many articles debunking different aspects of this. I would encourage you to go to one of our first videos, of my appearance on Capital Account with Lauren Lyster as well as scroll back through the articles.
The very point of the basis theory is to look at the spread between futures and spot.
Hi Keith,
any thoughts on the effect of lease rates, LIBOR, GOFO? Do they figure in your analysis?
Very interested in your opinion.
MetalsD
MetalsD: Thanks for your question. Last year, I wrote about both at least once or twice, just scroll back on the site…
Oh also, do you keep an eye on the registered supplies of gold and silver on the COMEX? Gold seems to have been diving substantially, the massive supplies you talk of above don’t seem to be appearing there? Do you see those levels increasing with lower/higher price?
http://www.24hgold.com/english/interactive_chart.aspx?title=COMEX+WAREHOUSES+REGISTERED+GOLD&etfcode=COMEX+WAREHOUSES+REGISTERED&etfcodecom=GOLD
Granted the silver inventories have been rising, in line with your observations on it being more plentiful, will be interesting to see how this plays out.
http://www.24hgold.com/english/interactive_chart.aspx?title=COMEX+WAREHOUSES+REGISTERED+SILVER&etfcode=COMEX+WAREHOUSES+REGISTERED&etfcodecom=SILVER
Regards,
MetalsD
Keith, if I may suggest, scrolling and looking is often more time consuming than people happen to have time, and also, not everyone is as efficient at searching as they could be. It would be tremendous if you could insert links when you refer us back to some article or video. Thanks.