This week, the price of gold rose $16 but the price of silver fell 39 cents. The catalyst for higher prices was early on Thursday morning (west coast USA time), when the euro and yen rose and to a less extent other assets like crude oil. Credit poured forth somewhere, or a sudden fear of dollar devaluation occurred, or something. It changed nothing, read on…
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. It rose sharply this week—3 ¼ percent. The ratio rose every day this week.
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
It’s immediately obvious that the cobasis is falling with the dollar. That is, as the gold price rises (inverse to the dollar) gold is becoming more available to the market. It’s still speculators driving things; a fundamental move would look different.
Despite this being the February contract mere days away from First Notice Day, and what we know is the new “normal”—the inexorable pull towards temporary backwardation—we see a falling cobasis. There are now no gold contract months in backwardation.
Keep this in mind the next time you read about massive demand for physical metal. At this price under this particular market, either more supply of gold bars is coming to market or demand is subsiding. It’s not huge. We’re talking about small changes to a very sensitive indicator. And yet the fact is no gold backwardation at the moment, not even in the contract that is quickly headed off the board.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
The dollar price measured in silver went sideways this week, and so did the silver cobasis—far away from backwardation.
Many peripheral currencies appear to be in serious decline right now, if not outright collapsing like the Venezuelan bolivar. If this continues, it likely signals a major credit contraction the likes of which the world hasn’t seen in several years. That is not a time to own risk-on assets, silver included. Even without that, under current conditions our neutral price for silver is well under $19.