Purveyor of Magic Words

The prices of the metals were sagging. Silver was trading around $13.80.

On Wednesday, Janet “Good News” Yellen said the magic words. The Federal Reserve hiked the federal funds rate by 25 basis points. The price of silver was surging in anticipation of the news (we assume). Within an hour or so of the announcement, it had spiked to $14.32, up 3.8% in a few hours.


dynamitePhoto credit: James Brey / Getty Images


Despite our note on 8 November, this week we have seen more than one article claiming that a rising interest rate is good for gold. Take a look at any longer-term chart of interest and the price of gold. They aren’t highly correlated.

Today, let’s look at a chart of the price of the S&P 500 overlaid with silver, zoomed in to this week. We’ve labeled the Yellen announcement.


chart-1-prices stocks and silverThe prices of stocks (S&P 500) and silver – click to enlarge.


Stocks did a round trip up and down. Silver did the same thing, but then diverged. Is this it? Is this finally the move to rocket hire that many have been over-confidently predicting?


The Pesky Fundamentals

Read on for the only true look at the fundamentals of gold and silver. But first, here’s the graph of the metals’ prices.


chart-2-prices 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 this week.


chart-3-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-4-gold basis and cobasisThe gold basis, co-basis and the dollar price – click to enlarge.


The cobasis (i.e. scarcity of gold) and price of the dollar (which is inverse of the price of gold, measured in dollars) continue to track. The price of gold is down $8, and the scarcity is up about 0.15%.

The neutral price of gold fell $14, putting it about $130 over market.

So what happened? People think gold is going down! In their view, the dollar is money, the objective measure of value, the economic constant. Gold is going down. What do you do when something is going down? Sell it before it goes down more!

Some metal is coming to market, though less as the price comes down. And/or buyers are starting to come back.

All we can do is point to the stress in the market, represented by the chronically elevated cobasis. Think of a saturated solution of sugar in hot water. As the water cools, it takes less and less to cause the sugar to rapidly precipitate out of solution and cascade to the bottom of the glass as white powder.

With the high and rising cobasis, the marginal supply of gold is coming from the warehouse.

What will cause the dollar to precipitate downward? We don’t know. We don’t think Yellen can really push interest rates up against the tide. And even if she could, that would not necessarily do it.

Now let’s look at silver.


chart-5-silver basis and cobasisThe silver basis and co-basis and the dollar price – click to enlarge.


Unlike in gold, the price of silver spiked. We don’t know what motivated the buying frenzy on Friday morning for the second time this week. But we can tell you it began with buyers of metals but was extended by speculators.

The fundamental price of silver fell this week, by 8 cents. It’s still over the market, but not by a whole lot.


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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4 Responses to “Janet Yellen Lit the Fuse – Monetary Metals Supply and Demand Report”

  • I read your reports with interest Keith. Other outfits have been calling a bottom as well, due in part to such negative sentiment. In the meantime, I have laid in a supply of gold and silver coins near this bottom over the past 5 months, if for no other reason than I don’t want to chase the price upward and we live in a time of monetary maniacs running the show. I wouldn’t mind seeing lower prices. The price of platinum interests me at these levels, but don’t see anyone giving away the coins.

  • therooster:

    In 1979, Volker was making the best of a bad situation. Saving the dollar and the dollar’s purchasing power was vital since the dollar, in the role of a currency (medium of exchange) was still in its apprenticeship for greater things to follow when gold could be monetized with real-time trade values based on its weight.

    The dollar’s other role, as a real-time price measure (not a currency of exchange) was still gaining market traction for the support it could provide in debt-free trades via price comparison of debt-free economic widgets, including bullion. Barter in spirit.

    You cannot simply pull a real-time pricing measure out of the dark and use it in support of debt-free trading. It has to have market experience and a market orientation, which means that it must also serve its apprenticeship as a debt-based currency, even if that means it’s by fiat No way around it ….

    There are a few necessary evils in the “script”

    The integration of a debt-free medium of exchange (bullion based and debt-free) can later be integrated once the real-time floating measure has cut its teeth.

    The dollar can be thought of like a segment of rope where that fact that it has two ends is inescapable.
    The highly useful end can be tied to gold or silver such that we compare pricing and trade fiat priced widgets for fiat priced bullion. The fiat does not have to be used in a currency (debt) role.

    Anyone care to trade some gold for a new suit ?


  • bart:

    While it’s true that “Take a look at any longer-term chart of interest and the price of gold. They aren’t highly correlated.”, taking a look at the late 1970s shows quite the decent general correlation. The 10 year Treasury was up from late 1976 through about mid 1981.

    But Volcker’s action starting in 1979 to bulk up CONfidence in the dollar had an early effect on having the metals peak much earlier.

  • therooster:

    Since precious metals can displace a deficiency in debt based liquidity that may be left when rates on fiat based debt currency rises, the view on PM’s in a currency application should be enhanced by a sane and sober world. Bullion is a real-time currency. Just don’t look for it to be acknowledged from the apex of the political, banking or media models, as change MUST be organic as a “prime directive”

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