Feel Good Now, Pay Dearly Later

The prices of the metals were up somewhat last week, gold +$7 and silver + ¢13.

The price of the S&P 500 index was up, as was the price of oil and copper, and the price of the euro, pound, and yuan. And bitcoin. Even the Treasury bond posted slight gains (i.e., there was a slight drop in yields).

 

There’s a reason why they call it the “everything bubble”. Its demise won’t be pretty, hence the recent frantic back-pedaling by assorted central bankers who tried to look “tough” for a second.  [PT]

 

This is how the system is supposed to work. Institutions and traders are supposed to feel safe borrowing more dollars to buy every kind of risk asset. To arbitrage the yield differential and speculate for capital gains.

Of course, the yield differential between the dollar and the developed economy currencies is negative. But at least there are capital gains.

So the central planners must feel good about the market moves this week.

There’s only one problem. These trades pile on more debt, in order to finance ownership of oil and copper. And the debt of other governments, which are themselves in the same pickle with no way out in the long term, if not short-term crises.

Businesses go on borrowing more and more, to consume copper and oil. They do this, in order to produce products. Which their customers borrow more and more to buy. When such borrowing can no longer be sustained, watch out.

One will not want to be in debt to finance a hoard of copper or oil. And the stocks of companies whose debt is impaired will certainly be no safe haven.

 

As of Q1 2018 global debt amounted to $247 trillion, another new record high. Debt growth has become exponential in recent years and much of it is either collateralized by overvalued assets or the state’s power of coercive tribute extraction from a shrinking pool of real wealth producers. Both of these require constant money printing. [PT]

 

Fundamental Developments

Perhaps today is not that day. Let’s look at the only true picture of the supply and demand fundamentals of gold and silver. 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 (see here for an explanation of bid and offer prices for the ratio). It was down a hair this week.

 

Gold-silver ratio – this ratio is akin to a credit spread, when it contracts economic confidence is usually improving. [PT]

 

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

 

The price of gold is up, yet it is still scarcer (at least the near contract, the gold basis continuous is basically flat).

We keep writing about this, not because gold is so scarce that we fear a bout of backwardation or worse yet, permanent backwardation. We write about it because it is a change from the last several years. We now see the price rising amid rising scarcity. That means the rising price is driven by buying of physical metal. It is not merely leveraged futures speculators front-running each other.

The Monetary Metals Gold Fundamental Price is up another $12, to $1,419. It is above its level from a year ago (which peaked over $1,500 while the market price peaked around $1,450) – very interesting indeed.

Now let’s look at silver.

 

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

 

Unlike in gold, the scarcity of silver is down a bit. That means the rise in price is driven more by futures market speculation, and physical metal demand is a bit weaker.

Still, the Monetary Metals Silver Fundamental Price is holding pretty steady, down just 7 cents to $16.45

 

© 2019 Monetary Metals

 

Infographic by Mauldin Economics, charts by Bloomberg, 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 “A Case of Happy Borrowing – Precious Metals Supply and Demand”

  • rodney:

    Dear Pater,

    It is with joy and pleasure that I witness your presence among the quick. You have a loyal following here, and to say that we were worried is a bit of an understatement. I sincerely hope that you can soon enough put your health issues behind.

    Wishing you well,

    Rodney.

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