The price of gold dropped six bucks, and silver seven cents.
Without much price action, let’s look a few other angles to gain some
perspective. First, here’s the chart of both silver and the decidedly
not-monetary metal copper.
The Prices of Silver and Copper in Gold
There’s a good correlation, with the biggest divergence being late 2014
through early this year. For copper, not being money, to hold out at a high
price before dropping looks like hope in the recovery. Or if not that, then
at least hope in QE and the theory that rising money supply causes rising
commodity prices. It didn’t work, and the price of copper dropped. It’s still
dropping and may yet break down below the low it made in late 2009.
Silver has an industrial component, so it’s no surprise to see its price
drop as well. Now let’s zoom in for better resolution, by looking at a chart
of copper priced in silver.
The Price of Copper in Silver
The price of copper in ounces of silver is nowhere near the low it made
early this year, much less the low of 2009 or 2011. As production and trade
decline, and as the rate of interest declines, we would expect the
non-monetary commodities to fall in price. Silver, which is partly
non-monetary has been falling in terms of gold. There’s no reason why copper
shouldn’t fall in terms of silver (apologies for the double negative).
The headline this week isn’t just to be gratuitously provocative. $13
represents one distinct possibility. How distinct? Read on for the only true
picture of supply and demand in gold and silver…
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 moved.
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
In both gold and silver, we switched to the next contract month. For gold,
that’s February and for silver it’s March.
We feel like we’re recording a record that’s broken while we’re still in
the studio (for younger readers, broken records would often keep repeating
the same short bit of sound over and over). The price of the dollar tracked
the cobasis (i.e. as the price of gold dropped, scarcity increased).
Our calculated fundamental price of gold is about $150 over the market
price. In other words, the market is offering to sell you gold at about a
12.2% discount. Remember this for a moment.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
It’s a similar picture in silver.
In fact, silver is trading below its fundamental price also. However, it’s
only at a 4.2% discount. If it were to go to its full fundamental value, and
assuming that doesn’t change, it would be up near $15.
But what if it were to go on the same kind of sale as gold? At a discount of
12.2%, silver would be down near $13.
© 2015 Monetary
Metals
