The price of gold was pretty sideways this week, though it was up a bit on Wednesday before coming back down. It ended the week about $3 higher. The silver price followed the same basic shape, but ended the week about 20 cents higher. Thus the gold to silver ratio dropped a bit.
As always, we are interested in the fundamentals of supply and demand.
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 this week, ending below 67.
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 dollar is all but unchanged and the cobasis is down slightly. The gold market still looks tight, but became perhaps a smidge less tight this week. This is interesting, despite the accelerated pace of the contract roll, where those who are long the June contract are selling and if they want to remain long they can buy the August or another contract. This selling pressure should be showing up as a rising cobasis.
The gold cobasis remains elevated—though not backwardated—across all contracts.
Now let’s look at silver.
Unlike in gold, the dollar fell in silver terms and the cobasis rose. The silver market definitely got tighter this week, though not a lot yet. Should this trend continue, it will be a significant change. We shall see what this week’s data brings, and report as it occurs.
© 2014 Monetary Metals