Monetary Metals Supply and Demand Report: 23 Mar, 2014

The gold price fell about fifty bucks, and the silver price fell about a buck twenty, which is even more as a percentage. It’s interesting to see what happened to the fundamentals of supply and demand along with these moves.

Here is the graph of the metals’ prices.

The Prices of Gold and Silver

Letter mar 23 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 1.38 points, or 2.1%. We are working our way towards the high set so far, set last summer.

The Ratio of the Gold Price to the Silver Price

Letter mar 23 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 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

Letter mar 23 gold

The cobasis continued to drop like a base metal brick this week. Here we are in the middle of March, and the April contract is under heavy selling. And despite this, the buying pressure on the April contract was great enough to push the cobais down to -0.65%. And the basis is now well within contango (at least in the new zero-interest rate normal world) of + 0.2%. The cobasis drops for farther-out months as well.

Not a good sign for those cheering for the dollar to drop (i.e. the gold price to rise), perhaps if they are using leverage in their bets. This is because we see the dollar rising about a milligram (i.e. the gold price fell) while the cobasis fell. It’s physical gold that came to market this week, folks. Physical gold metal was dumped on the bid.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

Letter mar 23 silver

The dollar got stronger when measured in silver as well. It went up 0.11 grams. The cobasis did drop a little, giving some encouraging signs for dollar bears (i.e. in the guise of silver bulls).

Nothing even close to scarcity appears in silver this week, or gold. It is an interesting theoretical question. How much gold is owned outright by hoarders who don’t plan to sell based on its dollar price? How much is held with leverage, i.e. borrowed money? How much is carried? If credit truly begins to crunch again, we may begin to get an estimate of the answer.

© 2014 Monetary Metals

7 replies
  1. Rueffallais says:

    Your analysis is more and more convincing even the stubborns and non believer should have a look at what you are writing.
    One more question however , the basis increasing while the cobasis decreasing wouldn’t it saying that the futures are more traded than the physical whether buying or selling .

    sell more futures than buy physical spot : basis increasing
    sell less physical spot than buy futures : cobasis increasing

    if physical comes however to the market , in the international contex being quite tense from where it comes from ?

  2. brpaul says:

    quite easy: this physical gold is coming from ukrainian central bank.
    All or part of it have been shipped to NY just as the new “prime minister” has been back from washington. Read the news.

    At the maximum, only 36t of gold was stored in ukraine (WGC dec 2013 data). At the rate of buy currently on COMEX, this means about 1 month of new supply. A small delay, but a delay.

    Of course, this is not official CB gold sales (WGC data will not change), just leasing/rehypothecating as usual, ie fraud.

  3. hitchee says:

    so much for the bullish outlook for gold, Keith?

    would the unwinding of the Chinese commodity financing deals play a role here, with them selling spot and unwinding their futures shorts? or am I comparing apples to oranges?

    if the above is true, where are they dumping the physical… where is it actually not scarce, in London or in Shanghai? I find it hard to believe that China would allow any gold to leave mainland in any significant numbers, probably a good buying opportunity for the locals and PBOC…

    • Keith Weiner says:

      hitchee: I am sure the technical analysts would look at the chart now and call for further correction in the gold price. They may be right. I will wait at least one more week before coming out with an actual bearish call. Silver is coming down nicely, as I have been predicting, both in dollar terms and in gold terms.

      You make an astute observation. I am working on an article now about the Chinese commodity play reported by Zero Hedge. The unwind of their trade would be sell spot / buy future. That could very well explain the rising basis and falling cobasis in gold. I agree, they will sell it wherever they find the strongest bid. Is that still in Shanghai? I dunno, but it would not surprise me in the slightest if that’s no longer the case, maybe.

      • hitchee says:

        thanks for your reply Keith and for confirming that there might be a connection. I’ll be looking forward to your take on this topic, though should gold loose Chinese spot bid it might get nasty (let’s just hope that the unfolding credit implosion and banking mini-panic in China will push more of their mainstream into physical gold).

        I might have missed it, but have you ever taken a stab at the potential impact of a deflationary collapse on gold price/purchasing power? On the surface it seems that gold might suffer due to “rising purchasing power” of the fiat (can’t believe I wrote that), but then again if all fiat money is backed by debt which in case of deflation would implode thus removing the backing, the fiat becomes worthless…interesting how this dynamic might unfold and what would be the timeline.

        Keep up the good work, much appreciated even if sometimes the message is difficult for the bugs…

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