Silver Is in a Different World, Report 21 August, 2016

Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams.

Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat, tossing about in stormy seas, if they would say “that lighthouse went up 5 meters.”

To our point last week, what would be the utility of a lighthouse that you measured from your boat which is going down and up, but mostly down? Would you wonder if lighthouses had another purpose, any other use? If you could make money betting against other sailors, on the lighthouse’s next position, would you care?

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffet

Of course, what Buffet doesn’t mention is that we’re forced to use paper certificates of government debt as if it were money. This debt is losing value as the government racks up ever more implausible amounts of it ($19.5T at the moment). Meanwhile, lenders are offered lower and lower interest rates to finance this growing monument to economic insanity.

Surely anyone from Mars would be scratching his head at this, too.

Unfortunately, Nixon’s gold default almost exactly 45 years ago to the day removed the extinguisher of debt. When you pay off a debt using gold, the debt goes out of existence. When you pay a debt using dollar, the debt is merely shifted. So the debt grows—must necessarily grow—at an exponential rate.

Also unfortunately, Nixon’s gold default also unhinged the rate of interest. It began to shoot the moon. It eventually peaked at an insane high (and historically unprecedented) level in 1981. Since then, it has been falling and now it keeps hitting insane low (and unprecedented) levels.

You can get yourself out of the loop by buying gold, but you cannot effect the debt, interest rate, or banking system. You are disenfranchised. Instead, we have monetary policy administered the way the Soviet Union had food prices set by bureaucratic diktat.

The problem is not that gold cannot have any utility. It had it, once. The problem is that the government has locked up gold’s utility. What’s left gold is just betting on the price action in the casino.

Sooner or later, that price action is going to come to an ignominious end. Contra the Quantity Theory of Money, the value of the dollar will go to zero. This will not be because its quantity rises to infinity. It will be because gold owners no longer wish to risk holding dollars, for fear of counterparty default.

About the best we can say is that today is not that day.

Read on for the only the only true picture of the supply and demand fundamentals that ultimately drive the price action. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter aug 21 prices

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

The Ratio of the Gold Price to the Silver Price
letter aug 21 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 aug 21 gold

Well, well, well. Look at that. The abundance of gold (i.e. the basis, the blue line) falling all week, and the scarcity rising. Indeed, we see now this pattern has been going since the end of June. The same pattern holds true for farther-out contracts.

This means that someone, or millions of someones—do not get too caught up in the fallacy of famous market players—is buying physical gold metal. In that time, speculators have not been eager to buy more. So the net result is that the fundamentals have nearly caught up to the price.

The Gold Price and Fundamental
letter aug 21 gold fund

The gold market may not be screaming “buy” yet—today is not that day—but it’s no longer screaming “danger”.

It is interesting to see that the speculators—who are really betting against the dollar, even if they don’t always know it—sometimes go their own way. Perhaps they see a central banker in the news, or the jobs report disappoints. Buy, buy!

No animal species can survive by cannibalism—by members eating other members. And speculators cannot drive the market by continually buying from one another, giving them both profits (as they reckon it, in dollars) and ever-rising price. Eventually either the fundamentals change and the speculators are proven right. Or the speculators give up, or get flushed out. This time, the speculators are proven right. They put their dollars in harm’s way, particularly since the end of April when the softening fundamentals fell below the market price. They continued to fall all the way through late June. But the market price did not follow this trajectory.

The Silver Basis and Cobasis and the Dollar Price
letter aug 21 silver

Silver is in a different world.

We do see a falling basis and rising cobasis this week. However, it’s just tracking price. That is rising dollar price (i.e. falling silver price) corresponds with rising cobasis. As speculators reduce their positions, the price falls a bit.

It has a long way farther to fall, before it catches down to the fundamentals.

 

© 2016 Monetary Metals

9 replies
    • hedles says:

      Agreed. Thanks Keith. May we also see the equivalent silver graph? And do you have longer term charts we could see for both going back to when you began calculating the fundamentals, or the beginning of your data, whichever is earlier? IMHO, these charts would provide added illumination to your weekly supply and demand reports.

  1. Koos Jansen says:

    I agree that gold in the long term is quite a constant currency with respect to purchasing power (although I think there is no true constant in economics; all goods, services, assets, currencies, etc must go up and down relative to each other caused by supply and demand trends). Historically, gold shows to be fairly constant on a gold standard, and even without a gold standard we can observe its impressive constant nature, albeit through volatile swings stretched over decades. In my view, this past week the dollar was more constant than gold. If the price of 1 apple at beginning of the week was $1 and at the end of the week it was $1 as well but the price of gold went up, what was more “constant”? $1 dollar or gold?

  2. kinghigh says:

    Hi Keith,
    Will you be advising your readers when the next time to back up trucks (lifeboats) is on the cards? Obv silver trucks are more fun than gold trucks but trucks is trucks. And the ‘truck precident’ was set by yourself a few months back.

  3. blowforhome says:

    Hi Keith,

    Could the failure of the market price to reach the level of the fundamental price during Feb, March & April be the result of deliberate manipulation, price suppression.

    Best regards

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