Chart Patterns

The prices of the metals dropped $20 and $0.39, a downhill slide interrupted on Thursday by speculation fueled by some economic data (as we covered in our special report), and which resumed on Friday.

 

Gold over the past two years. The blue rectangle outlines the pattern discussed below. It doesn’t really work well as a head and shoulders (H&S) pattern in gold, since the neckline would be beyond skewed. We should also mention that this pattern is really not what seems to be commonly believed nowadays. In its original meaning, an H&S pattern can only occur at the end of an extended trend, with the “head” marking a major price peak. The recent “head” would be below the peak seen last year, so it is disqualified based on this definition. Similarly, an inverse H&S pattern occurs only at a major low, not somewhere in the middle of a trend. Gold has moved sidewaysin a series of overlapping waves since rallying from late 2015 to mid-2016. In other words, this some sort of (complex) corrective formation is being built. Given that it has been two years since the price low (in non-dollar currencies the low was made 3 to 5 years ago), it seems highly unlikely that this is a corrective wave in a primary bear market. It is not impossible, but it isn’t likely. In USD terms gold trades 23% above its 2015 low – and it does so despite a fundamental macro backdrop that is at best neutral with a bearish tilt. All of this points to a beginning cyclical bull market. [PT] – click to enlarge.

 

A look at the price charts of both metal shows what could be head and shoulders patterns. The left shoulders are in June. The head is in September. And the right shoulder is occurring now. Or if you zoom out and look back to the start of 2017, you see a series of higher highs. In gold, at least. In silver, if you zoom to look at a graph starting in mid-2016, you see a series of lower highs.

Trying to divine the next price move based on past price action is trying to act based on incomplete information: the fundamentals. In stocks, we don’t know many people who look only at price charts, without regard to the company behind the stock. Why should it be any different in gold and silver?

 

Fundamental Developments

We will look at an updated picture of supply and demand. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.

 

Gold and silver priced in USD – 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 rose a bit.

 

In this graph, we show both bid and offer prices for the gold-silver ratio. If you were to sell gold on the bid and buy silver at the ask, that is the lower bid price. Conversely, if you sold silver on the bid and bought gold at the offer, that is the higher offer price.

 

Gold-silver ratio, bid and offer – 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 chart of the price of the dollar (inverse of the price of gold, in dollars) overlaid with basis and co-basis.

 

Gold basis and co-basis and the USD priced in milligrams of gold – click to enlarge.

 

The dollar is up (i.e. price of gold is down). And the gold basis (i.e. abundance) is down, and co-basis (i.e. scarcity) is up.

Our calculated Monetary Metals gold fundamental price rose $17.

Now let’s look at silver.

 

Silver basis and co-basis and the USD priced in grams of silver – click to enlarge.

 

Unlike in gold, in silver the basis and co-basis did not move (in particular the continuous silver basis). However, the price did fall and greater than gold in proportion.

Our calculated Monetary Metals silver fundamental price fell $0.22, to $17.08.

What do you get if you combine this with the silver price chart showing lower highs? A price target for the bottom of the trend perhaps in the mid 15’s, and a gold-silver ratio well over 80.

 

© 2017 Monetary Metals

 

Charts by: StockCharts, Monetary Metals

 

Chart captions by PT

 

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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One Response to “Precious Metals Supply and Demand”

  • therooster:

    It’s not the demand for bullion , alone, that will break the price out, but the kind of demand. The utility of gold as a market currency now looms large in order for gold to warrant such a breakout. Gold that sits idle has no utility value. That value comes in the movement of gold , whether gold is used in a currency application or whether it is moved into fabrication.

    Gold that sits idle like a golden calf in the desert of economic depravity is an abomination to economic activity.
    Now we truly understand why Moses almost had a stroke when he came down off the mountain. What do you think the people had been using as currency ?

    The utility of monetizing and circulating market gold, by way of direct consumer spending, is what will lead the greater demand and the price higher. Price will not lead and should not lead. Price will follow.

    goldmoney.com

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