Illiquid Trading Conditions 

In this holiday-shortened week (Thanksgiving), the price of gold dropped $20 and silver 10 cents. Friday, when the price dropped the most, could not have had much liquidity as most Americans were not at work, but shopping or partying. Whatever they may have been buying, it sure wasn’t gold.

 

Image via Getty Images

 

We might be inclined to take the basis data this week with a grain of salt.

Here is the graph of the metals’ prices.

 

chart-1-prices of gold and silverThe prices of gold and silver – click to enlarge.

 

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 fell last week.

 

chart-2-gold-silver ratioThe gold-silver ratio – click to enlarge.

 

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.

 

chart-3-gold-basis and cobasisThe gold basis and cobasis and the dollar price – click to enlarge.

 

The price of gold dropped, but the cobasis (i.e. scarcity) actually fell on Friday. If this day weren’t halfway to a holiday, we would be inclined to read more into it. Monday will be telling…

Our calculated fundamental price of gold fell a few bucks more than the market price, though it still remains about a hundred forty over market.

Now let’s look at silver.

 

chart-4-silver basis and cobasisSilver basis and cobasis and the dollar price – click to enlarge.

 

In silver, the cobasis was down the first part of the week though it rose on Friday ending up on the week.

The silver fundamental price, like that of gold, also fell and also more than the market price. It is still a ways over the market price though.

 

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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