Last week, we concluded with this:
“So now, for the first time in about two years, the fundamental price of
silver is above the market price, about $0.35 over.
…
Unless you really like to trade the bleeding edge of a signal change, you
may not want to jump in here. Silver’s newfound scarcity could disappear as
rapidly as it appeared. And even if it’s stable, it does not mean that the
fundamental price must necessarily skyrocket.”
On Tuesday this week, the silver price made an intraday low of $14.70. It
then rose to close the week at $15.56, 12 cents down from last week. The gold
price is down $3.
Of course this week saw more Greek drama, first the referendum rejecting
the bailout deal and then it seemed like a similar bailout deal is on again.
The stock market had some exciting volatility.
Anyways, we’re not about the stock market here. Read on, for the only
accurate picture of the supply and demand conditions in the gold and silver
markets, based on the basis and cobasis.
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. It moved up a bit this week.
Notable this week is a spike, which hit 78.3 on Tuesday morning (Arizona
time).
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
Measured in gold, the dollar rose. Scarcity (i.e. the cobasis, the red
line) rose with the move. This is the pattern that repeats time and again.
When speculators buy futures contracts, the price of the dollar falls and the
scarcity of gold falls with it. This week, speculators sold gold, driving up
the price of the dollar (to 26.75mg) and the scarcity of gold rose as well.
The fundamental price of gold still didn’t change. It suggests the market
price of gold could go up $35 give or take.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
On Tuesday, with the short, sharp drop to $14.70, the market price of
silver was more than a buck twenty five under the market price. We warned
many times this could happen.
The question is always, where to from here? Monday through Wednesday, we
had an incredible surging cobasis. This corresponds to what we heard from
dealers that buying of physical silver product was robust. Then, as we said
could occur, the pressure turned off on Thursday and especially on Friday.
The cobasis (i.e. scarcity, the red line) ended the week down a hair from
where it was last week. And this occurred with the price of silver down.
Stated more objectively, the dollar ended up on the week, closing at exactly
2 grams of silver. Tell that to anyone who says the dollar
is worthless! 
The fundamental price is above the market price, but just barely. Call it
a dime.
© 2015 Monetary
Metals
