FRN Muscle Flexing

Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver.

It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.


Even the freaking leprechaun is now offering government scrip…  this really takes the cake. [PT]


How the #$%&! could gold possibly be going down?!? Next week, we will dive deeper into some analysis of what could be driving gold down in recent months.

In the meantime, let’s just say that we observe two facts. One, the market price of gold has been coming down since the second half of April. It has dropped about $135 since then. Two, our calculated fundamental price, based on the basis, had been rising through late April. Since then, it has come down about $220.

Whatever the cause may be, something real has happened. It is up to market participants to deal with it. Or else they can trade their money for Federal Reserve Notes, in the belief that this would eliminate all risk…


Fundamental Developments

We will look at an update of the supply and demand picture. But first, here is the chart of the prices of gold and silver.


Gold and silver priced in USD


Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio for an explanation of bid and offer prices for the ratio). It fell a hair last week.


Gold-silver ratio – mildly lower on the week


Here is the gold graph showing gold basis,  co-basis and the price of the dollar in terms of gold price.


Gold basis, co-basis and the USD priced in milligrams of gold


As the price of the dollar moved up this week (we don’t need to say that this means the price of gold, measured in dollars, fell do we?) we see a little bit of rising scarcity in the co-basis for the October contract. However, that is not true for farther-out contracts.

The  Monetary Metals Gold Fundamental Price went down another $5 this week to $1,304.

Now let’s look at silver.


Silver basis, co-basis and the USD priced in grams of silver


In silver, the near contract shows no change in scarcity. It’s not all that surprising, given that the price didn’t move much. However, it’s somewhat surprising as the near contract happens to be September and we are nearing First Notice Day.

There is already selling pressure on this contract, which will tend to push its price down and hence its basis down and co-basis up (basis = future – spot, and co-basis = spot – future).

Basically (OK, pun intended) September silver basis and co-basis show nuthin’. The further contracts show falling co-basis (scarcity) and rising basis (abundance). Even as the price dropped a few pennies.

The  Monetary Metals Silver Fundamental Price fell another 20 cents, to $16.52.


© 2018  Monetary Metals


Charts by Monetary Metals


Chart and image 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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2 Responses to “Climbing the Milligram Ladder – Precious Metals Supply and Demand”

  • RandianZealot:

    When I said “the basis will always be the interest rate of the base currency minus the interest rate of the counter currency,” I meant to say “the basis will always be the interest rate of the COUNTER CURRENCY minus the interest rate of the BASE CURRENCY.” The examples I gave in the last two sentences of the paragraph clarify this further.

  • RandianZealot:

    It might confuse some readers when Keith says “As the price of the dollar moved up this week…we see a little bit of rising scarcity in the co-basis for the October contract. However, that is not true for farther-out contracts.”

    Why does Keith Weiner believe that scarcity increases when the co-basis goes up (or the basis declines)?

    In order to understand what he is saying, we first have to understand what mainstream finance professionals believe determines the basis, and how Keith Weiner’s view interprets this idea in regards to gold.

    In the mainstream view, the basis for a currency is determined by “interest rate parity.” In other words, the basis will always be the interest rate of the base currency minus the interest rate of the counter currency. This is because if it diverges from this number, “risk-free” arbitrages will push it back towards this equilibrium state. For example, if the USD interest rate is 1.5% and the JPY interest rate is 0%, the USD/JPY basis will be -1.5% and will trade in backwardation. If the EUR interest rate is 0% and the USD interest rate is 1.5%, the basis for EUR/USD will be 1.5% and will trade in contango.

    This theory of “interest rate parity” is not believed to apply to commodities like wheat, oil, or soybeans. Those commodities do not have large, liquid stocks available that banks can lent out at a moments notice. As a result, they have their own supply and demand dynamics that often override the effect of interest rates. So for example, the basis for oil is not believed to be determined by the spread between the oil interest rate (there is no oil available to be lent out, so what rate would you use?) and the USD interest rate. Instead, it is believed that oil goes into backwardation when it is “scarce” and contango when it is “abundant.”

    The question is: what determines the basis for gold? Is gold like a currency or commodity?

    We could certainly imagine that gold would behave like a currency. In that case, the basis would simply be the spread between the gold lease rate and the USD interest rate. If the gold lease rate was higher than the USD interest rate, gold would trade in backwardation. If the gold lease rate was lower than the USD interest rate, gold would trade in contango. But Keith rejects this view, opting instead to take the position that a falling basis (or rising co-basis) is an indication of scarcity, the same way it would be for wheat, oil, soybeans, or whatever. He even uses wheat as an analogy when explaining his position (see “Gold Basis: The spread between futures and spot market” in this article:

    What is not clear is why Keith Weiner holds this position. There are large stocks of gold held by banks, and it is available to be lent out into the market at a moment’s notice if gold becomes scarce. So why would he think that the basis would be determined by the scarcity or abundance of gold rather than the INTEREST RATE on gold and the dollar?

    Regardless, it’s important to keep these issues in mind. Otherwise, all of this talk about the “scarcity” or “abundance” of gold isn’t going to make much sense.

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