Yesterday, the
Department of Labor announced that initial jobless claims dropped. Quite a lot.
So naturally, markets reacted. The stock market began to rise. The euro rose,
at least for a while.
And the prices of our favorite heavy metals rose, particularly silver. Silver
was around its low of $16.92 before the report. Two and a half hours later, it
was $17.26. Our first reaction was to ask, “really?? Unemployment causes silver
buying?”
OK, sure, we
suppose if everyone is maximally employed, they will buy more jewelry,
electronics, solar panels, and all of the consumer products that contain
silver. Or, perhaps they will buy silver coins and stack them.
However, a 2
percent increase in just over 2 hours seems overdone. So we turned to the data
to take a look. We have described the basis theory many times. Today, let’s
just say it simply. If speculators are buying, they want leverage and they tend
to use futures. If there is real demand for real silver, these businesses and
stackers buy real metal.
These are two
different markets, with two different prices.
So we want to
look to see the change in the futures price, not relative to where it was but
relative to the spot price. We know how much it changed over 150 minutes: 34
cents. We want to look at how much it changed relative to the price of real
metal.
This
difference between future price and metal price is called the
basis. If the basis increased, it means
that the price action was driven in the futures market. If a speculator bids up
the price of a silver futures contract, then the basis goes up.
A market
maker will pull up the price of spot silver—you will not see the price of the
futures just divorce itself from spot. But spot is pulled up reluctantly,
dragging behind.
Our data
platform has the resolution to show these moves in high resolution.
Here is the
intraday graph, showing the gold price and gold basis (December contract)
before, during, and after the move.
The move in
gold was about $6. Yet we can clearly see there is a pretty good correlation
between basis and price. The conclusion: speculators saw the news item, decided
gold should
go up, and made it
happen. They front-run what they theorize ought to happen. But the fundamental
demand is not there. Perhaps one of these days, they will be right and demand
for metal will increase sharply after the speculators buy in. But we suspect
that today is not that day.
Although,
note that the basis shows a rise at the very start of the graph, and goes high
until after 10am (GMT) when the correlation with price clicks into place. We
place less weight on the drop in basis at the end. That is at the end of the
trading day, and sometimes spreads do funny things at times like that.
The
percentage move in silver was about four times bigger.
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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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