The Dollar Increases in Value

The dollar moved up, though most people would say gold fell about $40, and silver 32 cents. In the mainstream view, the value of the dollar is 1/N (N is the quantity). So how could the dollar go up? Certainly, the quantity keeps on increasing.


1 buckThe buck.


Our view is different. If you borrow dollars to buy an asset, and the asset doesn’t generate enough yield to pay the interest, you have to sell or default.

It should go without saying that it is an unsustainable Ponzi scheme if everyone keeps borrowing more and more to simply bid up the price of any asset (including gold).

So here we are, and the dollar is getting more valuable again.


Fundamental Developments

Let’s take a look at the supply and demand fundamentals. First, here is 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 a bit this week.


chart-2-gold-silver 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.


The red line is back to a tight correlation with the green. That is, the price of the dollar is rising (i.e. the price of gold, measured in dollars is falling). Along with it, we finally see a noticeable rise in the scarcity of gold. Gold finally got a bit scarcer as its price fell another $40.

Speculators were finally flushed out a bit, with stop orders getting hit in this brutal (to them) price action. Regular readers of Monetary Metals didn’t get caught, as we have been saying that the fundamental price of gold is below the market price.

Our calculated fundamental price of gold is just under $1,170. Sure, gold got scarcer with the price drop. But only in proportion.

Now let’s turn to silver.


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


The same pattern applies in silver. As is the case4 in gold, silver is scarcer at this lower price – proportionally.

The fundamental price is $13.90. This gives us a fundamental gold-silver ratio of about 84.


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 “Gold and Silver Aren’t Getting Stronger”

  • You can’t borrow dollars, banks don’t loan money.

    You can get bank credit denominated in dollars and exchange that for dollars.

  • therooster:

    If we change the use of the language a little for the sake of clarity and maintain market law as our common principle and guiding light, we get the following.

    When interest rates on debt (fiat currency) rise, then what ensues is typically a loss of liquidity and the ability to “grease the wheels” of trade. When debt based liquidity, more specifically, is reduced, it can leave a vacuum that can be filled and should be filled by another form of liquidity. Bullion and the demand for bullion can (and does) satisfy this situation, but this is a situation where the bullion is being used in a currency context and not being used as an investment (static) or a store of value (static). The value of the bullion is in the movement.

    As rates rise, it makes perfect sense that bullion values may rise on the basis that market demand is the right demand and the right demand sees bullion as a debt-free currency for pro-active support of the real economy.

    We are creatures of habit, however, so we tend to fall back on old habits which mean defaulting to the notion that gold is an investment or a store of value, where both support hoarding , not movement.

    Bullion is a currency. Treat as such. It has no economic value (short of fabrication) if it sits idle.

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