On Monday and Tuesday, the hopes of the gold and silver speculators were raised. Early on Tuesday morning (Arizona time) the gold price hit $1,255 and the silver price was $17.66. But by Friday’s close, the prices were down from last week by seven bucks and 8 cents, respectively. Silver, in particular, is developing a trend (discussed below).
In Russia, by contrast, the metals were up sharply. Gold gained ₽1,295 and silver went up ₽19. Russians are getting rich on the metals, whereas Americans are not.
Of course, we’re being facetious. The ruble has dropped 20% in the last 4 months alone. Those Russians who had the foresight to trade their rubles for money—rubles are the failing credit of the Bank of Russia, and money is gold (and silver)—have not suffered the ongoing losses of their comrades. They aren’t getting rich, just keeping even.
We believe we’ve made the point clear: gold does not go anywhere. It’s the dollar that goes up and down like a yoyo, but more down than up. The dollar is down from 1555mg gold in 1913 to 25.27mg today. We promise to stop beating this dead horse for a while.
Silver does go up and down, but we have to measure it in gold to see it accurately. The gold to silver ratio is is this measure, or rather the inverse. The ratio is the number of ounces of silver you need to buy an ounce of gold.
Last week, we reiterated our call for the gold to silver ratio to hit 75. This week, it closed around the same level as last week. However, on Wednesday it hit almost 72.5. Though there is no fundamental supply-and-demand reason for it to drop, it feels like we’re due for a sharp little spike in the silver price. Maybe the next time Janet Yellen is in the news, speculators could bid silver up to $18.35 and gold up to $1,260, giving us a ratio of 68 and change. Who knows, and we don’t make bets like that.
What’s next, particularly in silver? Read on…
First, here is the graph of the metals’ 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.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver 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 cobasis (i.e. scarcity) is up and so is the dollar (i.e. the price is down). It’s just speculators repositioning, and if anything, the fundamental price of gold has dropped a few dollars (though still above the market price).
Now let’s look at silver.
The dollar rose a bit in silver terms, but the cobasis fell, now down to -0.16%. When the cobasis moves opposite to the dollar price, it shows it’s not just speculators repositioning, but a change in the supply and demand fundamentals. Physical silver metal is, once again, coming to market.
The fundamental price of silver is down almost half a dollar and it’s way below the market price. We would name the number, but we don’t want to encourage hate mail.
Keith would love to meet readers face to face at The Gold Standard Institute’s event The Gold Standard: Both Good and Necessary, in Manhattan on Nov 1. There hasn’t been a real recovery from the crisis of 2008. The reason is not simply that the Fed has made a particular mistake. The cause of the crisis is the dollar itself. There will not be a recovery until we return to the use of gold as money. Please come to this talk to hear his diagnosis of the dollar and urgent prescription for gold.
© 2014 Monetary Metals