The gold price didn’t move much this week, but the silver price dropped 68 cents. The fundamentals of supply and demand show something clearly that price charts cannot. Read on…
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.
Here is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio rose 2 points—3.3%.
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 basis rose and cobasis fell. Gold is a bit less scarce to the market today, compared to last week while its price is unchanged. This bears watching. If gold continues to become more abundant and especially if this occurs with a flat (or falling) price, then the price could easily drop again.
At the moment, the fundaments in gold suggest a higher price.
Now let’s look at silver. We have switched from the March to the May contract.
Silver’s pattern hasn’t really changed. We see a rise in the dollar price as measured in silver (i.e. a drop in the silver price as measured in dollars). And with this price move, we see the cobasis rise a bit. Silver futures sold off late this week.
The cobasis, it should be noted, is still quite negative. More silver price dropping is likely ahead, in dollar terms. And it is all but certain to drop in gold terms; the gold:silver ratio is heading higher.
© 2014 Monetary Metals