The action favored bettors this holiday-shortened week
(Monday was Martin Luther King day in the US), with the price of gold up 13
bucks and silver up 26 cents.
We noticed a worrisome remark by newly inaugurated President
Trump. The strong dollar of the past 20 years, he said, is not good for
American competitiveness. Let’s just tackle this straight on. Actually, we will
address three distinct issues.
First, Trump said, “our companies can’t compete with China
now because our currency is too strong.” Keith is old enough to remember long
before the current scare about China, the scare was about Japan. Japan was
going to bury American companies, and buy up America. Or so we were told. It
would be interesting to look at the yen during this time, to see if it was
falling and giving Japan some of the competitive advantage that Trump theorizes
should occur.
As it turns out, it’s exactly backward. From a low of 0.33
cents in 1976, the yen rose to nearly 1.3 cents by the mid 1990’s.
Of course, this makes sense to everyone but benighted
economists. How could draining away the savings of the people and businesses
give any advantage? That is what currency devaluation really means. A loss of
everyone’s savings. Poof.
This brings us to the alleged strong dollar. On January 22,
1997—exactly 20 years ago—the dollar was worth about 89mg gold. Compare to
Friday, when it was just under 26mg, a loss of 71%. Orwell would be proud at
this new meaning of the word strong!
Of course, no one any more believes in any kind of objective
standard. The dollar, they think, should be measured by the euro, pound, and
yen. And they, in turn, are measured against the dollar. It’s a neat little
trick, a sleight of hand, to distract attention from
wholesale theft.
Finally, we have Trump advisor Anthony Scaramucci, who said
the rising dollar will “have an impact internally in the US”. He spoke of
“reaching out for lower-class families and middle-class families.”
To reaching for… that is a good visual for this. The
government will reach for their savings!
Fortunately, under the current structure, the president does
not have the power to push the dollar down. Heck, the Fed has been trying to do
that for years, and has not been succeeding. However, this is a worrying
development that bears close watching. Can anyone—including Trump—say what he
might do?
Below, along with the fundamentals, we show a hint of what’s
coming soon at Monetary Metals. But first, the price action.
The Prices of Gold and Silver
Next, this is a graph of the gold price measured in silver,
otherwise known as the gold to silver ratio. It fell a bit 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
We have switched to the April contract.
In a continuation of what seems to be the new pattern, we
have a dollar that continues to slowly fall. But, unlike the previous mode, we
have a rising scarcity of gold. That is, the price of gold is rising because
buyers in the physical market are getting hungrier, while sellers in the
physical market retreat.
However, note that the slope of the red line is not steep.
And, unlike the February contract, the April future is nowhere near
backwardation. The cobasis is -0.8%.
Let’s preview a chart that will be publishing on our site
soon.
The term structure shows the basis and cobasis for contracts
going out a year and a half. This is generally where all the interesting
features would be. Note the absence of any interesting features. Just a nice
gentle rise in the basis and fall in the cobasis, exactly what we would expect
(other than the small backwardation in the Feb contract which is sliding off
the left edge into oblivion).
Needless to say, this is not a picture of any kind of
shortage, imminent banking crisis, or magic trick by the UN or International
Monetary Fund.
While the market price of gold moved up a bit, our
calculated fundamental price move up more. It’s now a bit over $1,300. Not
crisis territory by any means, yet interesting in light of a market price at
$1,210.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
In silver the cobasis is also rising, also slowly.
Our calculated fundamental price moved up 50 cents from last
week. It is now just about at the market price.
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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.
