Revenge of the Fundamentals, Report 22 May, 2016

The price of gold moved down about twenty Federal Reserve Notes, and the price of silver dropped $0.57. The big news is that the gold-silver ratio moved up about 1.5. We hate to say “we told you so,” well, OK. Actually… sometimes there’s a certain je ne said quoi about gloating.


In all seriousness, the dollar is going up. We measure it in gold, or alternatively in silver. In gold, the dollar rose 0.4mg gold to 24.84. In silver, it was up 60mg to 1.88g silver. We do not think that the dollar can be measured in terms of its derivatives such as euro, pound, etc. for the many of the same reason that the gold can’t be measured in terms of its derivative, the dollar.

Why is the dollar going up? It’s the debtors that give value to a debt-based currency (not the quantity). Right now, debtors are feeling the pressure. Meanwhile, most mainstream speculators are looking at price charts and they want all-in on the dollar (most would look at this as avoiding gold exposure).

Let’s take a look at the supply and demand fundamentals. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter may 22 prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio was up significantly this week.

The Ratio of the Gold Price to the Silver Price
letter may 22 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 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
letter may 22 gold

You can see it clearly on this chart. As of this month, the price of the dollar (i.e. price of gold is falling) is rising but the scarcity of gold is falling.

Our calculated fundamental price of gold is around $1,170.

Now let’s turn to silver.

The Silver Basis and Cobasis and the Dollar Price
letter may 22 silver

In silver, the cobasis is actually down for the week despite a large rise in the dollar (i.e. fall in the price of silver). This is despite the lopsided pressure on the July contract (it happens earlier in silver than it does in gold). In farther-out contracts, the silver cobasis is lower.

It is worth emphasizing that the silver cobasis dropped on Friday to around the same level as Wednesday, despite the price being 35 cents lower.

Our calculated fundamental price of silver now has a 13 handle on it.


© 2016 Monetary Metals

23 replies
  1. RD says:

    Nothing more normal after a fall of the gold ratio of more than 10 points of a rise.
    Happy to see that strong SELL sell of silver is back.
    With you fundamental price of gold way below the spot and silver even much more than current one, the only logic conclusion is not long gold/short silver, but short silver.
    If not that means you are not following your own indiactors.

  2. rosslm888 says:


    For a long period we have seen gold well under it’s fundamental price, a while back I recall you had it over $1400 why wouldn’t it be possible for the fundamental to be well below the market price. It would be good if you could publish the fundamental versus market in graph form say the last few years every week.

    Thanks for your work

    • bbartlow says:

      Agree, good point. Month after month Fundamental was waaay above price but price kept falling and falling and falling and falling and falling… you get the picture.

      Why can’t the reverse happen? Answer: it can.

      When the Fundmental seems to predict a market move, we gloat. When it fails miserably we remind everyone how it’s not a short term indicator.

  3. Bob says:

    The FED threatens to raise rates again and everybody dumps the monetary metals in pandemic fashion. Why isn’t anyone considering the massive damage irrefutably caused by this action? The immensity of the bond markets are such that even a miniscule rate rise has to leave substantial holes in bank and public pension fund balance sheets. The most recent analysis I’ve read on the subject is, that every half-a- percent increase results in a loss of about 1.6 trillion in the global bond market. If it weren’t for rampant ignorance, the monetary metals would surge against fiat on rate rise news, not the opposite. Prudence should dictate ignoring all the FED MOPE, and instead stack on! After all since “It’s the debtors that give value to a debt-based currency” and with debtors limiting out, where is the currency going to come from to make good on the bond bubble debt? The continued capital destruction makes it a matter of when, not if! Don’t you think?

    • RD says:

      If the assumption by Keith is true, that means will USD will ever be proped up against gold and he will have to post a strong sell of silver AND gold permanently and not this permanent backwardation BS. Indeed, it is not some monetary scientists or other keynesian economists who have “discovered ” ZIRP or deflation as an issue for monetary TBTB, it had been discovered by Karl Marx himself !

      By the way gold exchanges rates with fiat currencies will continue determined by geopolitical and geostrategical issues, not by any purchases levels by the public.

      I also continue to note that Keith ‘s fundamental prices is tracking all technical analysis, nothing new here !

  4. mike n says:

    It seems to this novice in economics that ZIRP is an attempt by government to try and hide the fact that a deflation is already underway, that it can be managed so as to avoid any sudden painful jolts, and that if everyone just agrees to go along with the charade i.e. if everyone says the emperor has clothes, well then, the emperor will have clothes. To put it another way, reality is created by head count (and wishful thinking).

  5. Keith Weiner says:

    RD: You could short silver, but we never recommend naked shorting a monetary metal. You don’t know what some central bank is going to do overnight and when you wake up, you could be staring at price +25%.

    • RD says:

      You are issuing 50 out 52 weeks a year about the poor silver fundamentals (spot always above fundamentals and often declining against USD) since the beginning of this site but this fundamentals prices could flip in an “instant” so in fact it is only backwards indicators or at least useless or irrelevant.
      Maybe fekete has a better in waiting his permanent backwardation like Godot…

      • bbartlow says:

        I tend to agree. Have never seen a consistently bullish commentary here (a precious metals site) on poor man’s gold. Which raises the question of what the Fundamental Price did during silver’s 2011 run to $50.00. (I’ve asked before, never get an answer … so i have a good guess) So he’s absolutely correct, it is NOT a short term indicator!

        Unless it happens to work… then it is!

        P.S. For those who feel a need to hedge physical holdings, rather than shorting futures you might consider a vertical put spread in SLV or GLD. For example, buy a put (preferably at the money or slightly in the money while simultaneously selling a more distant put to help offset time decay.

        Such a strategy does limit profit potential… but the point should be to protect/hedge a portion of one’s position, not to generate a net profit.

  6. Ratio says:

    Double: posted incorrectly on an old thread.

    Turn of 2016.
    Analysis Ag: price above fundamentals. Bearish.
    Result: rapid, sustained price rise.
    Not a short-term disparity followed by return to fundamental but sustained move in the opposite direction inconsistent with any fundamental indicative power.

    March 2016.
    Analysis ratio: ratio below fundamental. Bullish.
    Result: rapid, sustained decline in ratio.
    Probable interpretation as above, but not conclusive yet.

    – the “fundamental” indicator does not lead Ag price in 2016.
    – the “fundamental” indicator is unlikely to lead the ratio in 2016.

  7. Ratio says:

    Well that was a reaction…
    Ratio up 1.5 points becomes the headline for a weekly post, we restrain ourselves for a moment with difficulty from gloating … then fail and lapse into something akin to French.

    This is all very much to the good, because it sets a precedent, which – for the sake of consistency – reasonable readers will expect to be observed. We now know that a move of 1.5 points in the ratio is worthy of a powerful response.

    So from our intermediate high in the 76s…

    Ratio down 2 or 3 points ought to require two headlines from weekly posts – in capital letters and perhaps in a larger font. Unrestrained expressions of regret involving Latin and Russian at the very least. Graphs reviewing the whole move down from 83 and reassessing the ability of the fundamentals to make any meaningful indication on the ratio…

    Or a footnote perhaps: “the ratio went down a little”.

  8. Pizza Genie says:

    Gold appears to be coming back in to the CME warehouses as the basis has risen according to the daily reports. Last year there was a noted drop in the gold inventory on the CME as we had backwardation for a lot of 2015.

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