On Thursday, the prices of gold and silver took off 50 dollars and 54 cents, respectively, on a statement by Dallas Fed President Dick Fisher. He declared that, “fiscal shenanigans have swamped QE taper prospects”. That was enough to light the fuse. As always, the question is: speculators or hoarders? Read on.
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 the graph of the metals’ prices.
The Prices of Gold and Silver
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
We have labeled the drop in the dollar (i.e. rise in the gold price) when Fisher made his statement. Right next to it, we can see that the cobasis fell. This means gold became less scarce, at the higher price. The price moved by the actions of speculators.
Like Pavlov’s dogs, traders buy gold and silver when the Fed says anything about increasing the money supply (or not slowing down the rate of increase). They are trying to front-run what they believe will be the endless buying of gold by hoarders, who take it off the market. Unfortunately, in this case, they front-ran themselves. There is no guarantee that the price will drop right back to $1280, but in the past each of these Fed-announcement moves has been undone fairly quickly.
For several weeks, we have been documenting a pattern. The fundamentals of gold aren’t really changing at the moment. So with each price increase, we see the cobasis drop and with each price decrease, we see the cobasis rise. Gold is scarcer when it’s cheaper, and more abundant when it’s more expensive.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
Silver is in a similar trend, though the cobasis is at a much lower level. In case you missed it above, December gold is slightly backwardated. By contrast, the silver cobasis is quite far below the zero line.
The Ratio of the Gold Price to the Silver Price
The ratio of the prices of the monetary metals rose slightly this week.