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.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

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 ?

    https://www.facebook.com/groups/LiquidBullion/

  • 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”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Pushing Past the Breaking Point
      Schemes and Shams Man’s willful determination to resist the natural order are in vain.  Still, he pushes onward, always grasping for the big breakthrough. The allure of something for nothing is too enticing to pass up.   From the “displays of disbelief, revealing touching old-fashioned notions” file... [PT]   Systems of elaborate folly have been erected with the most impossible of promises.  That prosperity can be attained without labor.  That benefits...
  • The Myth of Capitalism - A Book by Jonathan Tepper
      Crony Capitalism vs. Free Markets Many of our readers are probably aware of the excellent work our friend Jonathan Tepper does for Variant Perception (VP)*****, a financial research boutique that really does bring a unique perspective to the table*. Jonathan (with co-author Denise Hearn) has just added a new book to his résumé, which is going to be released on 12 November: The Myth of Capitalism (MoC) – Monopolies and the Death of Competition** (a link to the official site is at the...
  • Three Cheers for James Riley!
      Going All In All people, of both good and questionable character, share a singular talent.  They excel at taking something that’s tolerable in moderation, and then pushing it to the outer limits of absurdity.  Why live with restraint when you can get radical?   A fairly famous stretch of LA riverbed graffiti... [PT] Photo credit: saber   Public and private debt levels, NASDAQ stock valuations, the federal register, face tattoos, canned energy drinks.  You name...
  • Crumbling Piles of Sand
      Just a Little Avalanche or an Implosion? A few years ago, we briefly discussed the dynamics of sand piles in these pages, which are a special field of study in mathematics and physics (mathematically inclined readers can take a look at two papers on the subject here:”Driving Sandpiles to Criticality and Beyond “ (PDF) and  'Games on Line Graphs and Sand Piles “(PDF) – unfortunately two other studies that used to be available have in the meantime disappeared from the...
  • When Fake Money Becomes Scarce
      Remaining Focused A rousing display of diversions this week assured the American populace was looking every which way but right under its collective nose.  Midterm elections.  White House spats with purveyors of fake news.  The forced resignation of Attorney General Sessions...   Old drug warrior (otherwise recused) on his way home to Alabama...   Sideshows like these, and many more, offered near limitless opportunities to focus on matters of insignificance.  Why...
  • Fun and Profit - Precious Metals Supply and Demand
      While Not Saving The Planet, Let Us At Least Have A Good Time The price of gold went up seven bucks, and that of silver rose eight pennies. For many people, the attraction to gold and silver began with a desire to protect themselves from the monetary train wreck of 2008. That often grew into a sense that gold is the solution to that problem.   The post 2008 GFC monetary train wreck: US true broad money supply is expanded by more than 153% in a mere decade, as the Fed takes...
  • Wizard’s First Rule – Precious Metals Supply and Demand
      The Last to Go Terry Goodkind wrote an epic fantasy series. The first book in the series is entitled Wizard’s First Rule. We recommend the book highly, if you’re into that sort of thing.   An image from the title page of Terry Goodkind's best-selling fantasy epic “Wizard's First Rule”. We'd be at bit wary of standing around on that stone-slab bridge to be honest. [PT]   However, for purposes of this essay, the important part is the rule...
  • US Stock Market - Re-Coupling with a Panic Cycle?
      The Mighty Gartman Investment newsletter writer Dennis Gartman (a.k.a. “the Commodities King”) has been a target of ridicule at Zerohedge for a long time. His pompous style of writing and his uncanny ability to frequently make perfectly mistimed short term market calls have made him an easy target.* It would be quite ironic if a so far quite good recommendation he made last week were to turn into the call of a lifetime (see ZH: “Gartman: 'We Are Officially Recommending Shorting...
  • Roger Barris for Congress!
      Economic Man Threatens to Leave You Alone if Elected This one is mainly for readers residing in that glorious water source for California commonly known as Colorado. In case you are not aware of it yet, Roger “Economic Man” Barris, an occasional contributor to this site, is running for Congress in Colorado on a Libertarian Party ticket. We will briefly explain why you should vote for Roger, but first two pictures:   Roger Barris, Libertarian Party candidate for the House...
  • It's Not That Day Just Yet - Precious Metals Supply and Demand
      Degrees of Urgency Monday was Veterans Day, a bank holiday in the US. The prices of gold and silver dropped $23 and $0.61 respectively. “But isn’t gold supposed to go up when...?”   Warren Buffet and Aragorn discuss what to do with the gold. Aragorn wants it, because he knows that even if it's not today, “that day” will come. [PT]   Why? Because everyone else will bid it up. Why? Because they expect someone else to bid it up. Why? Warren Buffet is...
  • Revisiting the Halloween Effect
      From Crash Danger to End-of-the-Year Ramp   [Ed note by PT: we are unfortunately a week late in posting this issue of SI, which didn't reach us in time due to a technical problem. We decided to post it belatedly anyway: for one thing, the effect under discussion is normally in effect until the end of the year; for another, the statistical validity of this information goes beyond the current year, as it is a recurring phenomenon. Lastly we would note that we have a strong...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!