Monetary Metals Supply and Demand Report: 21 June, 2015

The Fed made an announcement on Wednesday. Moderate consumer spending growth and improving housing sector balanced against soft business investment and exports. Prices are rising, but not as much as the Fed would like. The announcement roiled the markets. Here’s a graph of the 10-year Treasury yield and the S&P Futures up to and after the announcement.

Treasury Yield and S&P
Fed Announcement

All times are Arizona

The price of gold also shot up, and continued higher and held through Friday. The price of silver behaved similarly, at first, but then dropped sharply Thursday morning and continued to sag thereafter.

On the week, the price of gold ended +$19 and silver $0.14.

Ambiguous Fedspeak announcements are not the important news this week. That is surely the sad situation of Greece. After years of kicking that can down the road, it would appear that they are at the end. It seems to be the end of Eurozone (i.e. German) patience, Greek tolerance, Greek banking system collateral, and of course Greek cash to pay creditors when due. The final, final meeting seems to be coming soon. It would take a miracle for the ECB, IMF, the Fed, and other central banks to keep a lid on this volatile mixture when it finally blows up.

Read on, for an updated picture of the supply and demand conditions in the gold and silver markets.

First, here is the graph of the metals’ prices.

The Prices of Gold and Silver
letter jun 21 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, is 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 (stocks to flows) 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, and under the right conditions. 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. It moved up again this week.

The Ratio of the Gold Price to the Silver Price
letter jun 21 ratio

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 brief 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
letter jun 21 gold

The dollar fell another 0.42mg of gold this week (i.e. the price of gold rose). It is interesting that the scarcity (i.e. the cobasis, the red line) fell after the price of gold rose on Wednesday.

The only thing that didn’t move much is our calculated fundamental price. It’s still above the market price, though the market is closer.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
letter jun 21 silver

The dollar fell slightly in silver terms, and with it the scarcity of the metal.

The fundamental price of silver didn’t move this week either. It’s still quite far under the market price.

While it may seem common sense that the prices of gold and silver should react to the crisis developing in Greece by rising sharply, the supply and demand fundamentals are not showing us any kind of shortage. That said, it’s certainly possible that speculators will pile into futures contracts. Heck, it’s even possible that the fundamentals will get tighter, with fewer and more reluctant sellers and more and more aggressive buyers. Should the former happen, you will see it on any price chart. When and if the latter happens, you will read about it here.

Be careful out there.


© 2015 Monetary Metals

3 replies
  1. arionov says:

    Hello, I wonder what is the reality between the real price and the price in the market are complet differant. The world demand is the highest and the prices(prizes) is at the lowest. we can conclude that market is forged price or is two different market. I do not understand. THX

    • Keith Weiner says:

      arinov: The “price in the market” is the “real price”. One can buy at the price in the market, or at a premium based on the product. For example, a 1oz coin may trade $50 above the quoted price but coins have a fairly consistent spread.

  2. GeneMcm says:


    How far back can you construct the gold to silver price ratio? When I did gold to oil, I went back to 1903, but a lot of that was fixed values.

    If you do a weekly comparison, for maybe ten years, that would only be 520 data points; if you did a monthly comparison for say 50 years, that would only be 600 data points. Either would be a snap for EXCEL to process, plot, calculate an average and standard deviation.

    Gene McManus PhD

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