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
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
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 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
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