The prices of the metals dropped by 20 bucks and 20 pennies this week. In
other words, the dollar went up ½ milligram gold or 30 mg silver. It wasn’t
the euro, which ended the week unchanged. It wasn’t the US stock market,
which ended up seven bucks.
What was it?
To answer this, we are reminded of a curious panel at the London Bullion
Market Association conference a few weeks ago in Vienna. One of the panelists
said “it’s hard to predict the price.” It seemed a lot like saying it’s hard
to bend silverware by mind power. The panelists all agreed that the price of
gold will fall, to like $800 or so. Readers know that we don’t see any such
price in the data (and we don’t heed such predicts based on flawed
methodology). Of course the fundamentals could change, but it’s no way to
make predictions based on, “well things could change”.
In the same vein, we will not opine as to what caused the noise in the
prices of the metals this week. It could be a large holder placed an order to
sell. It could be that, in the words of Jon Snow, “winter is coomin’”
(traveling in the southern hemisphere at the moment, we are reminded to say
summer is coming here in New Zealand!)
What we do know is that the actions of buyers, and in this case sellers,
leave their fingerprints on the market.
Read on for the picture of supply and demand fingerprints…
First, here is the graph of the metals’ prices.
The Prices of Gold and Silver
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
(stocks to flows) 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. The ratio barely budged this week.
The Ratio of the Gold Price to the Silver Price
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
The scarcity of gold tracks still the price of the dollar in gold. You may
be wondering what the heck happened on Wednesday 28 Oct. The scarcity (i.e.
cobasis) dropped and the abundance (i.e. basis) spiked. The price of gold was
$1180 for a while that day. It didn’t close at that price, it dropped but
that was late in the day. So the abundance and scarcity are tracking the
price more closely than the deviation that day would seem to indicate.
Our calculated fundamental price was flat on the week, about $1160.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
The same intraday price anomaly occurred in silver.
Unfortunately, for silver speculators (we reserve the word investment
for buying an asset with the expectation of earning a yield, for financing
something productive), the December data paints a more bullish picture than
data from farther months. Both metals have a tendency for contracts to slip
into backwardation as they near expiry. Silver does it in a bigger way than
gold, perhaps because central banks can’t lease silver to smooth out
volatility as they can with gold.
To put it in perspective, the Dec 2016 gold basis has been crushed down to
+28 basis points (i.e. 0.28%). The silver basis for that same month is
comparatively large +78 bps (both of which are highly affected by our zero
interest rate environment).
Silver is simply more abundant than gold. Call it the industrial side of
silver being weak, whatever you will. That is the fact.
We calculate a fundamental price for silver well over half a buck below
the market price. This is where we got the headline for this Report. The
fundamental price is well under $15.
Keith is helping put together a series of Monetary Innovation
Conferences. The first two are in DC on Nov 13, and Phoenix on Nov 17. This
is not just for the right wing, but for everyone from the unbanked to Wall
Street. At the conference, speakers will discuss gold and how innovators are
using it to solve real problems for real people. Please click
here to register. After the conference, we may put on a Monetary
Metals seminar if there is sufficient interest. Please click here if
interested (different link).
© 2015 Monetary
Metals
