Tricky and Dangerous Assumptions

For at least a few weeks now, we have noticed a growing drumbeat from a growing corps of analysts. Gold is going to thousands of dollars. And silver is going to outperform. Reasons given are myriad. Goldman Sachs apparently said to short gold, so if one assumes that the bank always advises clients to take the other side of its trades — a tricky and dangerous assumption at best — then one should buy gold.

 

Goild conspiracyA metallic conspirator and his flying factotum…

Image via sceptic.com

 

Then there’s the change in ETFs, for example the Sprott Physical Silver Fund has had inflows and Sprott bought more silver. And there’s currency wars, money printing, negative interest rates, etc. Most of these stories are based in fact (well except the belief that Goldman’s research is always wrong).

However, they have little to do with the price of gold. The money supply has grown steadily since 2011 while the prices of gold and silver have not. Hell, the money supply has been growing since forever. And the price of gold has gone up as well as down.

Something tells us that this effort to draw in buyers is concerted. Certainly there has been an 8.4% increase in silver held in trust for SLV. This is the result of relentless buying of SLV shares. When buyers push up the price of SLV relative to the price of silver, that creates an arbitrage opportunity for Authorized Participants.

They buy silver metal, create SLV shares, and sell the newly issued shares. They can do that as much as they want while there’s a profit to do so. But of course this pushes down the price of SLV until it is very close to the price of silver. SLV is somewhere between metal and futures. It can be a speculative play on price, but it’s bought with less leverage and it can also be a long-term holding for many people.

Another sign of increasingly bullish consensus is the discussion last week at Mines and Money in Hong Kong. If everyone agrees that price should go up, then that may indeed occur. The exchange-traded funds are being bought, which further supports a price rally, one that may be a bit more durable than these Yellen announcement rallies.

However, keep one thing in mind. The speculators are trying to front-run the hoarders. Speculators need to sell, to take profits or cut losses. What they can drive up, they can drive down ten times as fast. A durable rally can only occur if there is movement of metal out of carry trades sold to speculators, and into the hands of stackers.

But who knows? Such a rally could in turn spark hoarders to buy and the fundamentals could develop to support it. We keep saying that the price of the dollar will fall far indeed, it’s just that the time hasn’t been ripe yet.

 

Fundamental Developments

The prices of the metals were up modestly this week. Let’s look at the only true picture of supply and demand fundamentals. But first, here’s the graph of the metals’ prices.

 

Chart-1-pricesGold and silver prices – click to enlarge.

 

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio was down this week.

 

chart-2-ratioGold-silver ratio – click to enlarge.

 

For each metal, we will look at a graph of the basis and co-basis 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 co-basis in red.

 

Here is the gold graph.

 

chart-3-gold basis and cobasisGold basis and co-basis and the dollar price – click to enlarge.

 

After it separated in mid-March, the green dollar price line and the red gold scarcity line have been tracking once again. That is, gold becomes more scarce the more the dollar goes up (i.e. the more the price of gold drops). And vice versa.

The price of gold was up $17 this week, which is the same as saying the price of the dollar was down 0.36 milligrams. The cobasis, our scarcity measure, fell from -0.55% to -0.62%.

That said, the fundamental price moved up about $15. It’s almost a hundred bucks above the current market. Now let’s look at silver.

 

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

 

In silver, the scarcity would appear to be holding up better in light of the rising price. However, some of this is the distortion that formerly caused temporary backwardation. The May contract is under steady selling pressure, as naked longs have to sell before First Notice Day. For July by contrast, the co-basis is -1.1%. Last week, we said:

 

“If the May co-basis goes positive this week, it will be a recurrence of temporary backwardation. For years, we documented the tendency of each contract to tip into backwardation as it neared expiry. For silver it tended to happen a bit farther out than for gold. If it happens this week, it will not be particularly early compared to what we saw occur in contract in contract.”

 

As it turned out, the cobasis fell sharply. From 0%, it dropped to -0.66% by Tuesday. It bounced around from there, with quite a lot of volatility. Volatility approaching First Notice Day is to be expected, especially in the present regime where market makers are under more regulatory scrutiny. Our calculated silver fundamental went up a dime, which is de minimis.

We are in Singapore this week for Mining Investment Asia. Keith and Bron are both speaking.

 

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

   
 

One Response to “The Precious Metals Conspiracy”

  • Kreditanstalt:

    “The money supply has grown steadily since 2011 while the prices of gold and silver have not.”

    I have a long, long investment time horizon, fortunately, but that statement is enough for me.

    After all, “if something can’t go on, it will stop”. We’re just disagreeing about timing.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The India-China Border Issue
      Deep-Seated Racism and Happy-Smiley Hypocrites In Delhi, people of the northeastern part of India, who have mongoloid features, are derogatorily called “chinky.” It is not unusual for men in Delhi to stop their cars to proposition a random girl from the northeast for a sexual encounter, assuming her to be “loose.” Indians' ignorance about the geography of their own country, their irrationality, superstitions and bigotry have been fertile ground in these days of Covid-19. People...
  • Silver “Scarcifies” – Precious Metals Supply and Demand
      On Monday, Silver got Scarcer – and Simpler On 23 July, we said:   “Well, it’s complicated.”   The action on 27 July was not.   Silver spot price vs. September basis   Notice the big drop in the basis starting around midnight (London time). It falls from over 7% to under 2%. To refresh: Basis = Future(bid) - Spot(ask) For the first two and half hours, the spot price is not moving. So, the only way the basis can drop is if the price...
  • Best Laid Schemes
      A Really Neat Bridge   But, Mousie, thou art no thy-lane, In proving foresight may be vain; The best-laid schemes o’ mice an’ men Gang aft agley, An’ lea’e us nought but grief an’ pain, For promis’d joy! – Robert Burns, To a Mouse, on Turning Her Up in Her Nest With the Plough (in extract), 1785     Installation of the final cable support pipes on the Gerald Desmond bridge replacement. Here is a drone video of the project. [PT] Photo by...
  • Silver Explodes — But Why? Precious Metals Supply and Demand
      Explosive Days in Silver The silver market witnessed another explosive day! At midnight (in London), the price of the metal was $26.90. By 9pm, it had rocketed up to $28.95, a gain of 7.6%. This is not normal. But then, we are not in a normal world.   After several years of going nowhere and a downside fake-out in March this year, silver has come to life rather dramatically... [PT]   The Republicans are spending like drunken Modern Monetary Sailors. And...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

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!