Monetary Metals Supply and Demand Report: 28 June, 2015

The price of gold sagged all week. The price of silver took a similar journey, though it was up on Monday. On the week, they were down 25 bucks and 28 cents, respectively.

On Friday around midnight Arizona time, there was a flash crash. We will publish a forensic analysis of this event late on Monday.

As of this writing (Sunday afternoon Arizona time), the headlines are telling us that Greece has imposed capital controls, and the markets should brace for impact.  If the Greek actually occurs now, look for rising volatility likely in all markets, and falling prices across many markets.

Read on, for the only accurate picture of the supply and demand conditions in the gold and silver markets, based on the basis and cobasis.

First, 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, 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 down a hair 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 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

The dollar rose more than half a milligram of gold this week, (or as perceived from inside the Matrix, the price of gold fell). Scarcity (i.e. the cobasis, the red line) rose with the move.

But it didn’t quite keep up. The fundamental price is still above the market price, but that’s only because the market price is down.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

The dollar rose in silver terms (i.e. the price of silver in the Matrix fell). Notably, the price of silver in reality (i.e. in gold terms) rose slightly.

The fundamental price of silver rose a nickel this week. It’s $17.39.

Last week, we said:

“While it may seem common sense that the prices of gold and silver should react to the crisis developing in Greece by rising sharply…”

This was almost prescient. When markets opened for trading this (Sunday) afternoon (AZ time), the prices of gold and silver shot up. We shall see if this is a fundamental move, driven by buying of metal. Or perhaps it’s speculators thinking surely this time the prices of the metals will rise!

Maybe.

Look for our forensic report on Friday’s flash crash, coming tomorrow.

Keith will be speaking at FreedomFest in Las Vegas, the week after next. Drop him a line if you want to meet up.

© 2015 Monetary Metals