The price of gold went up $12 this week, and that of silver
$0.50. That’s not bad for gold and silver owners, and not good for the vast
majority who are all-in on the dollar (though they don’t think of it that way).
Since we began publishing this Supply and Demand Report four
and a half years ago, there have been several constants. One, we have focused
on the supply and demand fundamentals, and the mechanics of the market.
Two, we have tried to show that short-term price moves are usually
random. For example, we have documented many spike ups followed by let-downs
whenever the Fed Chairman went on TV. And we all know that the long-term price
trend is up (the mirror of the falling dollar). However, neither random short-term
bursts nor the long-term trend is actionable for trading. In between, there is
the fundamental which tends to pull the market price either up or down,
depending on market conditions.
Three, there is no gain when the gold price goes up. This is
because gold is not going anywhere. If you bought 100oz of gold 20 years ago,
then you still have 100oz of gold now (minus storage costs). Sure, it’s worth
more dollars but those dollars are worth proportionally less (and if you sell,
the tax man will take a big chunk).
This may seem like mere semantics, but it’s an important
principle. It’s the dollar which is volatile. And its gyrations can only get
worse.
Therefore, wealth should be measured in gold ounces or
grams. We recommend you periodically take the dollar value of your assets, and
divide it by the current price of gold. If the dollar value goes up, but the gold
value is down, which are you going to believe? One is the numeraire
extraordinaire that man has valued for thousands of years, and the other is the
elastic dollar managed by a central bank whose stated policy is devaluation at
two percent per annum (a target they cannot accurately hit).
You can make
gains in gold if you bet successfully on the price moves in both directions. If
you buy when the price is lower and sell when it’s higher, you will end up with
more gold. The trick is to make sure you buy the gold again, otherwise you will
have given up your gold and got only paper in exchange.
And you can make gains in silver, as silver goes up and down
as measured in gold terms. Most people call this the gold-silver ratio.
Four, we have included charts generated from software
developed by Keith. The data was the highest quality possible in that
environment, and the best available.
The first three will remain the same, but number four is
changing. We are now launching a software platform that is the culmination of
Keith’s development of the arbitrage theory of markets since 2010, his model of
the gold market, and four generations of software (two by him, and two by our
VP of Software, Rudy Mathieu).
We had to solve some Big Data problems, as we licensed 21
years of tick history data from Thomson Reuters. It is over 2 terabytes—big enough that you
can’t handle it with a conventional database. We had to solve some Data Science
problems too. Data from the real world is messy (and in some historical time
periods, incomplete).
We believe we now have the cleanest data, and hence the best
signal, bar none. Our software platform makes it possible for us to see the
full breadth of the market dynamics and to drill deep as well. We will be
showing many new graphs, including the
Gold
Forward
rate (GOFO) with both bid and offer.
In this Report, we include the new graphs, generated by the
new software. You will notice that we show the bid prices of the metals. There
is no such thing as a single price (except in the case of a fix, like the gold
fix). There are always two prices in a live market. We believe that the bid is
a better measurement of what a thing is worth. It is the price you would be
paid, if you sold it.
Next, this is a graph of the gold price measured in silver,
otherwise known as the gold to silver ratio. It moved down 1.5 points this week.
In this graph, we show both bid and offer prices. If you
were to sell gold on the bid and buy silver at the ask, that is the lower bid price.
Conversely, if you sold silver on the bid and bought gold at the offer, that is
the higher offer 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 bid price of the dollar is calculated from the offer
price on gold (as buying gold is just selling the dollar).
We see a small rise in the basis (i.e. abundance) and drop
in cobasis (i.e. scarcity), while the dollar dropped 2mg (i.e. the price of
gold went up).
Our calculated fundamental price fell a few dollars (you can
view the chart
here)
although our new software platform calculates a higher value than the old. It’s
important to look at why.
The reason is on this graph of the continuous basis both from
the old software (with the old data provider) as well as the new.
The new basis (abundance) is a bit lower and the new cobasis
(scarcity) is a bit higher, compared to the old. That’s why our calculated
fundamental price is higher.
Which is more accurate? While we still have more work to do
validate the new, we would bet an ounce of fine gold against a soggy dollar
bill that the new values are more accurate for two reasons. One, the raw data
is better. Two, the new software is better. Is it possible there is a bug? Of
course, but we would not expect a bug to result in a tighter spread.
The absolute value of the fundamental prices of the old and
new software/data are different. However, the direction (and approximate size)
of the move this week is the same.
Now let’s look at silver.
Click
here for 3 year and 21 year
versions of the chart above.
In silver, there is almost no change in the July basis or
cobasis.
However, the market price is up. And so it’s not surprising
that our calculated fundamental price is up as well (both old and new).
Here is the corresponding graph comparing the old and new
continuous silver bases.
The difference is even more pronounced in silver. Whereas in
gold, the basis came down 10bps and the cobasis up 13bps (on May 26). In
silver, the basis came down 34bps and the cobasis up 45bps. The cobasis is now
much closer to a mirror image of the basis. It will never be perfect, which is
just how the math works out.
Recall that basis = future(bid) – spot(ask), and cobasis =
spot(bid) – future(ask). If there is a bid-ask spread (and there is), then the
cobasis will be more negative than the basis is positive. On Friday, the old
basis and cobasis are 1.44% and -1.74%, respectively. The new are 1.10% and
1.30%, which are closer both in absolute and percentage terms.
What is the new silver fundamental saying? Well, remember
that technical analyst we’ve been writing about since the beginning of May?
Well let’s just say that the new silver fundamental calculation definitely does
not suggest that one ought to have shorted silver or ought to be shorting it
now.
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Keith Weiner is CEO of Monetary Metals, a
precious metals fund company in Scottsdale, Arizona. He is a leading
authority in the areas of gold, money, and credit and has made important
contributions to the development of trading techniques founded upon the
analysis of bid-ask spreads. He is founder of DiamondWare, a software
company sold to Nortel in 2008, and he currently serves as president of
the Gold Standard Institute USA.
Weiner attended university at Rensselaer
Polytechnic Institute, and earned his PhD at the New Austrian School of
Economics. He blogs about gold and the dollar, and his articles appear
on Zero Hedge, Kitco, and other leading sites. As a leading authority
and advocate for rational monetary policy, he has appeared on financial
television, The Peter Schiff Show and as a speaker at FreedomFest. He
lives with his wife near Phoenix, Arizona.
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The
author is not affiliated with, endorsed or sponsored by Sprott Money
Ltd. The views and opinions expressed in this material are those of the
author or guest speaker, are subject to change and may not necessarily
reflect the opinions of Sprott Money Ltd. Sprott Money does not
guarantee the accuracy, completeness, timeliness and reliability of the
information or any results from its use.
