Supply and Demand Update 2 Dec

This is a brief follow up on the Supply and Demand Report of 30 November. In that report, we observed an extraordinary development in the gold market. We made several predictions, which came true almost immediately. We don’t always expect this to happen, but today we think it’s worth looking at what we said and what happened.

Regarding the gold-to silver ratio, we said this:

“[W]e will stick with our call for likely further upside in the ratio. We could see 80 or higher.”

On Sunday (Arizona time) when the market opened, the ratio briefly spiked to 80.94.

Regarding the incredible backwardation in four contracts (Dec, Feb, Apr, and Jun), we said this:

“We suspect that this time, it’s a matter of price. We believe that when the price rises enough, this backwardation will subside.”

The price of gold closed at $1,167 on Friday. As I write this on Tuesday morning, it is $1,200. This is a gain of $33. The backwardation in the Feb contract has dropped by more than two thirds. It is gone entirely, in the Apr and Jun contracts.

Regarding the spikes in the cobases last week, we said this:

“Thursday was Thanksgiving, a major holiday in the US and Friday was a shortened trading day and probably had poor liquidity. So we might be somewhat inclined to take this development with a grain of salt. Only somewhat.”

In hindsight, the poor liquidity of a shortened holiday week was almost certainly a factor, in three contracts going into backwardation so suddenly. A price change of $33 isn’t all that big, and it’s hard to attribute the change in the cobases this week just to price action.

Regarding the price of gold, we said this:

“This might be a good time to go naked long gold, especially if you like to jump on the leading edge.”

The price of gold went up to $1212 by close on Monday. Assuming you did not use leverage, you made 3.9%. Or more, if you bought futures on margin.

Regarding the collapse in open interest in gold futures, we said:

“…[it] looks like it may be a major capitulation in the gold market. This doesn’t mean that there couldn’t be a bit more selling, especially when the market wakes up to the news from Switzerland.”

There was a selling frenzy on Sunday evening. The price of gold was down to $1,142 at one point.

We said the price could drop due to the “bad” Swiss news and it could go up to cure the backwardation in three contracts. Both price moves happened and the backwardation was almost entirely cured also.


© 2014 Monetary Metals

11 replies
  1. RD says:

    You also wrote this :

    “We suspect that this time, it’s a matter of price. We believe that when the price rises enough, this backwardation will subside.”

    and it appears you were wrong ?

    Am I misunderstood ?

  2. wmbates says:

    You deserve a good gloat. I appreciate your views on the precious metals and, more important, your courage in sticking to them. There’s a lot of noise in precious metals commentary and I find you cut through it rather well.

  3. Music says:

    Wanna go 2 for 2? GOFO is still negative out to 6 months according to LBMA.. POG=1255 within 10 days?

    Thanks for the reports – prefer your analysis to all the articles giving ‘reasons’ why it will move (rise).. “Chinese demand/Ebola/War/$Crash/Chinese demand/War etc..”

    All the best,

  4. Keith Weiner says:

    Thanks for the comments.

    petter: It is important to emphasize that not every move is forecast by the basis. Also silver and gold tend to behave similarly.

    RD: The price rose a bit and the backwardation mostly subsided.

    wmbates: Thank you!

    Muisic: I could easily believe the price of gold will hit 1255 but it could be tomorrow or next month.

    • Rueffallais says:

      We should search around the jude wanniski targeting of a gold price. If the theory is deployed what would be the good price to target ? : the one where the hedging of gold is implemented by the mines. I think it could be a good idea to search when hedging starts really to pick up , is there any indicator about hedging ?

      One other question to Dr Weiner, how is the mechanics of your basis : how many points do you have a day ? do you do it at regular time or in continue

  5. dschaack says:

    Keith, great analysis, as usual. Someday, I hope to be able to make a substantive comment about your content, but that day is not today.

    There is a problem with your web page template or style sheet that has been bugging me for a long time, and on today’s article, the problem has gotten much worse. Today’s text is overwritten by 5 pair of opening quotation marks in a very large font — I estimate that it might be 60 points. I am using Internet Explorer 11.

    Today I could read your text, for the most part, despite the overlying quotation marks. In the past, I have had to resort to viewing the source for the page in order to be able to read it.

  6. Greg Jaxon says:

    I’m glad you followed up promptly after Monday’s trading, whether to gloat (because you were right it took a price move to knock back the co-basis) or to tone down (because “this is serious” may have overstated Friday’s lesson).

    Friday after Thanksgiving was not fully attended by all the market players. Let’s just say that those holding gold were also holding their vacation time and probably for the same psychological benefits.

    So Friday’s data were Telling, but not particularly Significant. Here is how I summarized your analysis to my favorite “markets are efficient; bubbles do not exist” skeptic:
    “[Friday] demonstrated that inefficiencies are latent in all markets. They are usually hard to observe, unless you’re a specialist (the arbitrageur tuned in to the least crack in a price spread). But on days like Friday, when those guys kick back, the spreads are magnified so that we all can see. How wide and in which direction the spreads open up indicates the stored “pressure” in the bubble. Think of it like a ship whose sails have to kept in trim, when some of the crew drop out the more rigid set of the sail makes the ship react more directly to the prevailing wind.

    Events like this validate the core Austrian explanation for the forces that keep markets efficient. Lack of human action makes them dramatically less efficient. That teachable moment would be crystal clear if your charts included volume data as well.

    Happy Holidays

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.