Monetary Metals Supply and Demand Report: 29 Dec, 2013

The dollar fell this week. Most people would say gold went up 10 bucks and silver 66 cents. As always, the question is what happened in supply and demand in the metals? Was this speculation? Fundamentals? Did the market dynamics change? Read on…

Here is the graph of the metals’ prices.

The Prices of Gold and Silver

Letter Dec 29 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 fell a bit more this week.

The Ratio of the Gold Price to the Silver Price

letter dec 29 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 dollar fell and along with it so did the cobasis.

The Gold Basis and Cobasis and the Dollar Price

Letter Dec 29 gold

The correlation between the gold cobasis and the price of the dollar continues yet another week. At this slightly higher price we have slightly less scarcity of gold in the market. Of course, this was Christmas week and one would not expect major changes.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

Letter Dec 29 silver

The dollar fell (i.e. the silver price rose) and the cobasis fell.

It is interesting that the cobasis had been sitting at zero and then fell on Friday as the silver price rose. Silver bulls may love those speculators for driving up the price, but should be concerned to see a lack of fundamental buying (i.e. hoarding) to sustain it. Silver became less scarce at $20 than it was at $19.40.

Last week, we published an article looking at something very different from supply and demand fundamentals: sentiment. Sentiment would seem to offer the same conclusion as the fundamentals. Be cautious with silver.

This week, we’ll publish an article to answer the question of what could make the cobasis flat to falling with a basis that’s falling? Typically, the cobasis is close to a mirror image of the basis.

1 reply
  1. Mo says:

    Thanks Keith. Your work is appreciated and I intend to seek out your “donate” button shortly.

    On a different note, you occasionally reference assertions made by some regarding the Fed and various market manipulations; e.g., The Fed is not a private creature manufactured on an unfortunately named island, etc., etc.

    Are your ideas on these subjects published more fully?

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