A continuing curse—nay, scorn even!—was heaped upon the gold and silver faithful this week. Those who cling still to faith, faith that gold and especially silver will go up, have been grievously injured. Gold fell far below $1140 on Wednesday. Silver got down to $15. At least that’s how gold speculators—those who bet on the dollar’s decline by going long gold—see it.
In our view, the dollar rose this week, hitting a high over 27 ¼ milligrams of gold on and 2.07 grams of silver.
In the immortal words of Vizzini (from the Princess Bride) it’s inconceivable that the dollar could go on rising. It’s been rising since its low of 16 ¼ mg gold in 2011. Why is it inconceivable? Well, the Fed is printing money. And as everyone knows, the value of the dollar goes down as the quantity goes up. The rising dollar price hasta be manipulation. Gotta.
Italics above indicate what people know that isn’t so (with due apologies to Mark Twain).
In separate, but related news, the gold to silver ratio, which we said should hit 75, hit 75.43 on Wednesday.
What’s next in the monetary metals? Will silver trade with that 12 handle? Will the ratio go to 80? Will we get more hate mail? 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, 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 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 rose further to 74.6.
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 went up ¾ milligram before subsiding, ending the week down 1/10mg (i.e. the gold price went up). It is noteworthy that the cobasis (i.e. scarcity), which had been rising with the dollar, did not fall with the dollar on Friday.
December gold backwardation stands now at 0.3%. The February and April contracts are not backwardated, but are pretty darned close. There is no sign of the imminent apocalypse, but these developments are definitely … interesting.
We put the fundamental price around $1230.
Now let’s look at silver.
Measured in silver, the dollar rose as it did in gold. However, we see a difference in Friday’s pullback (i.e. rise in the silver price). The silver cobasis (i.e. scarcity) pulled back with the dollar. In gold, fundamental buying (i.e. metal) is pushing up the price. In silver, it may be a bit more biased towards speculative buying (i.e. paper).
It is telling that in Friday’s rally, gold went up more than silver. Also, silver ended the week down from the week before.
The fundamental price of this metal now has a 14 handle on it.
We are not technical traders. But it seems to us that with each passing week, and with each dollar drop in the silver price, the odds of a rally rise. Until the fundamentals change, this rally should not be confused with the big breakout that Darth Vader’s Storm Troopers are looking for. We certainly don’t recommend leveraging up on silver to bet on this. It is not a prediction, more in the way of caution against shorting silver (if we haven’t said it in a while, we NEVER RECOMMEND NAKED SHORTING A MONETARY METAL).
We suspect that 74.6 is not “it” for the ratio. It likely has more lift left in it. Do we dare press our luck and call a ratio over 80? With the caveat of a bull trap rally in silver, and of course the fundamentals could change, we say yes. 80 and maybe higher than that.
Below is a graph showing a fascinating correlation between one measure of credit availability (the spread between junk bonds and Treasurys) and the silver price.
As the spread falls (i.e. credit availability falls) so does the price of silver.
© 2014 Monetary Metals