Loose Monetary Policy Remains in Place

Last week, we asked where then will silver go. Well, the price moved around this week, dipping on Thursday but then rebounding sharply on Friday. It closed up 13 cents from last week. The price of gold rose $24.

This week, the Federal Reserve announced that it will not hike rates. Most economists (and traders) have long been expecting a hike (not us).

 Fed_tightening_cartoon_09.09.2015_largeIt was just a thought….

Cartoon by Bob Rich

 

A hike is tighter monetary policy, and therefore not-hiking is looser. Which means a greater quantity of dollars. Which means higher prices. Everyone knows that (except us).

So naturally, on the announcement, the price of silver blipped up about 20 cents. It continued to drift another 25 cents higher. And then cascaded down almost 65 cents. Almost no one knows that prices, including the prices of the metals, have anything to do with the quantity of dollars (except us).

Then the price began drifting higher, had another sharp drop, and drifted back up again. Though it ended the week quite a bit lower than the post-Fed high of $14.85.

Folks, we have to say it. This is all noise. Not the non-hike. That is serious economics that is undermining capital, crushing business profit margins, driving asset bubbles, and ruining pension funds and banks. The Great Fed Falling Interest Rate since 1981 continues.

The price moves on these events. Over the long term, only buyers and sellers of real metal can set the price. In the short term, leveraged speculators can place big bets and thereby push or pull the price down or up from where it would otherwise be.

 

Fundamental Developments

Let’s take a look at those buyers and sellers of real metal, in the only true picture of the supply and demand fundamentals. But first, here’s the graph of the metals’ prices.

 chart-1-pricesPrices of gold and silver – 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 up a bit this week, interesting when the prices of both metals are up.

 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.

 

Look at that red co-basis line (i.e. scarcity of gold). It is dropping along with the price of the dollar (inverse to the price of gold, measured in dollars). In other words, gold becomes less scarce and more abundant the higher its price. Huh, that’s not what some gold promoters are saying, is it?

Our calculated fundamental price is down almost $40, more than $140 below the market price.

Now let’s turn to silver.

 

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

 

It’s a similar picture in silver. Note that the co-basis is at a (much) lower absolute level in silver, compared to gold (-1.7% vs. -1.2%).

The fundamental price fell over 30 cents, now $2.40 below market.

 

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 “Soft and Softer Silver Fundamentals”

  • Kreditanstalt:

    “In other words, gold becomes less scarce and more abundant the higher its price.”

    …so when “the gold price” in paper dollars was at $1700-$1800-$1900 a few years back, did you say we were drowning in a veritable sea of gold (metal)?

    I think we’re drowning in comex paper bets on “the gold price” now, not the real metal.

    • The commercials are short. That is paper that turns hard, when called. The paper expires. The speculators can always exercise, if they could. Without both, there wouldn’t be futures market.

      The complaint is that the shorts can’t deliver, thus they suppress the market. Since this hasn’t blown up yet, it appears the longs are as naked or more so than the shorts.

      That is not to say it won’t blow up, just as the paper money systems are apt to collapse. This will occur like a thief in the night, most likely when either the debt backing the issuance of central bank credit breaks down or when they merely print money without acquiring anything to back it. There is a third option, when the banks have about bought all of it.

      I would welcome a lower price. I laid in a good position near the bottom of both gold and silver last year. I don’t believe that low will hold, but as in any insurance, you pay and don’t worry. I want to be able to eat, if necessary, more than I want to make a few more dollars. Unless one is filthy rich, metals should be looked at as nothing more than ones bottom dollar. The one they hope they never spend.

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