Monetary Metals Supply and Demand Report: 20 Apr, 2014

We have data only for Mon-Thu, as this was a shortened week due to Good Friday.

On Monday, the price of gold bumped up $9 but there was no move in the silver price. On Tuesday, the prices of both metals dropped. The gold price ended the week down $24 from last Friday. The dollar rose from 23.6mg gold to 24mg, and from 1.56g silver to 1.59.

So much for the FOMC non-news news of last week.

As always, we want to know what happened to the fundamentals, so 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 moved sideways.

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 dollar rose a bit (i.e. the gold price fell). And the cobasis rose a bit. Slight changes in speculative position drove a slight change in the price and a slight change in the cobasis.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

It should be noted that the May silver contract is under heavy selling pressure. Naked longs, who use futures to speculate on the silver price, must sell their May contracts soon, as First Notice Day is coming up. They must sell before then, if they don’t have the cash balance to take delivery of 5,000oz of silver (just under $100,000 per contract).

What does selling do? It presses down the bid. Basis = Future(bid) – Spot(ask). The contract roll pushes down the basis. We can see that it began in earnest around early to mid March.

The market makers cannot stand in the face of such relentless selling pressure, and so the bid tends to drop relative to the ask. That is, the bid-ask spread tends to widen, which is why we don’t see the cobasis shooting up as much as the basis drops. Cobasis = Spot(bid) – Future(ask)

Post 2008, we have had intermittent temporary backwardation, with the cobasis rising above zero days or weeks (or last July, in gold, months) before First Notice day. Now, this close to expiry, the cobasis just peeked above 0. And only for one day. The July cobasis, for reference, is below -0.7%.

Why would the ask on silver futures remain stubbornly so high? What kind of market action would push up the ask on futures? There must be relentless buying pressure on silver futures. Who would be doing that? Why would they be doing it?

© 2014 Monetary Metals