Gold, the Dollar … and Batman

We can’t count how many articles we saw today, bemoaning gold going down. The price action is bad for gold (whatever that means). China under-reported their gold holdings. No, China doesn’t care about gold. No they want the price to go down so they can buy it cheap.

No, they want to convince the IMF to include the yuan (which has capital controls, by the way) into the SDR basket. No, China really intends to revalue gold (whatever that means). This is your brain on dollars. Any questions?

 

Batman knows bestAs usual, Batman knows best

Image credit:  Bob Kane

 

This is the worry of a dollar thinker. A dollar thinker buys gold for one reason: to sell it. Either he sells it when the price goes up, and he gets more dollars than he paid. Or else he sells it for less, and takes a loss. But sell it, he must. Sell it, he plans. And his sole concern is the price of gold.

We would suggest that you, dear reader, think in gold terms. The dollar distorts prices, balance sheets, business plans—and thinking. Here is a graph showing the gold view of the dollar.

 

chart-1 dollar in mg of goldThe dollar in milligrams of gold – click to enlarge.

 

The dollar is going up. This is good for everyone with a bank account, a business, a pension, annuity, insurance. Or a job. It’s bad if you have made a leveraged bet to short the dollar using gold (e.g. buying gold futures on margin).

 

Relax, Robin

We suggest that you ought to be concerned with the scarcity of gold. Is gold coming onto the market as the price drops? Or is it disappearing into a growing shortage?

Even dollar thinkers can appreciate that if gold is becoming scarcer as its price falls, then the price will turn around. Probably abruptly. On the other hand, if the metal remains abundant, or becomes more so in light of a price drop, then the price could keep falling.

So what is it? What happened over the course of this long price drop? Here is a graph showing the gold price. We have overlaid our gold scarcity measure, the cobasis, in red.

 

Chart-2 basis and cobasisGold price and the cobasis – click to enlarge.

 

Some of the rise is due to the phenomenon of temporary backwardation. As we near First Notice Day of the August contract (at the end of the month), the cobasis tends to rise.

However, there is also a proportional rise in the October contract (which has been in backwardation since Wednesday last week, when the price was $1149.

Now relax, Robin.

 

Charts by Monetary Metals

 

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith 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. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

 

 

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2 Responses to “Lions, Tigers and Gold Bears, Oh My!”

  • Kreditanstalt:

    It’s not “all or nothing”. You are not either thinking “in dollars” OR “in gold”.

    Everyone has a “price point” at which he is willing to “sell” his bullion. For some it is far, far higher than is today’s dollar price. For others, especially (as you noted) the leveraged, yesterday is not soon enough to sell.

    It all depends on one’s time horizon, something you should have mentioned. Where my “selling price” lies is determined by my personal financial status…and, like everyone, I am a potential seller at SOME point.

  • wrldtrst:

    “The price action is bad for gold (whatever that means).”

    Accepting the fact that I have prejudices with the product, I won’t trade gold. But since 2014 the chart looks like poop. Breaks a 10 yr trendline and then moves back up into it to fail. Easy to see why tech guys don’t like it.

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