Liquidity Shortage

Last week the price of gold rose $28, and silver $0.53. But the prices of the metals was not the big news last week. The price of repo — a repurchase agreement, to sell and repurchase a treasuries — skyrocketed. Banks were thirsty for liquidity, and only cash can quench it.

 

Last week’s “oops” moment in repo land as the overnight general collateral rate briefly soared to 10% (we will soon publish a detailed summary of the sequence of events that has led to this hicc-up). [PT]

 

Just another day in the fool’s paradise of centrally planning an irredeemable currency and its interest rate. Just another crisis, to be tamped down by the central planner. Keep Calm and Carry On.

This is a curious phenomenon, where the market is offering a risk-free trade to give up one’s dollars and get them back tomorrow plus a return. Yet no bank or other trader is taking the bait. The problem was not a shortage of trust, but of liquidity.

When trust in the system collapses, then gold will withdraw its bid on the dollar (which most people will wrongly perceive as the disappearance of offers to sell gold). This will be permanent gold backwardation.

So the question that should be on everyone’s mind is: did gold drop into  backwardation this week? Or silver? Read on to see graphs of the gold and silver co-basis (backwardation is strictly when the co-basis > 0).

 

Fundamental Developments

Let us look at the only true picture of the supply and demand fundamentals. 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). The ratio fell (the chart values are Arizona morning time, whereas we are discussing the weekly close).

 

Gold-silver ratio, bid and offer

 

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

 

Not even the near contract is in backwardation. And the gold basis continuous is not in backwardation either. They are both around -2%. Conversely, the basis is just a bit under 2%. Gold is so abundant, that one can buy the metal and simultaneously sell it forward, to earn an annualized return of around 2%.

Whatever the ramifications of the repo crisis, they do not yet include systemic trust concerns. We do not expect the repo problem, in itself, to lead to such concerns or to gold backwardation.

The Monetary Metals Gold Fundamental Price fell $6, to $1,492.

Now let’s look at silver.

 

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

 

In silver, we also see the absence of backwardation (though the co-basis is a bit higher).

The Monetary Metals Silver Fundamental Price dropped 7 cents, to $17.92.

 

© 2019 Monetary Metals

 

Charts by FT/Refinitiv, 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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