Fun and Regret Ex Nihilo

The price of gold dropped last week, but not calamitously. From $1514 to $1459, or -$55. The price of silver dropped. Calamitously. From $18.08 to $16.75, or -$1.33. -3.6% vs -7.4%. Once again, silver proves to be volatile relative to gold.

 

Silver jumped off a cliff again last week – the chart formation nevertheless continues to look corrective. [PT]

 

In standard vernacular, the metals lost purchasing power this week. Purchasing power can be thought of as the amount of groceries you could buy, if you liquidated an asset. If you think of an asset as a store of purchasing power, then there is some amount of groceries contained therein. And this week, some of groceries leaked out of gold. An alarming amount poured out of silver.

As an aside, such market moves are offered as proof that gold is not money, that the dollar cannot be measured in gold. To which, we say, “Ha! The dollar rose this week from 20.5 to 21.3 grams of gold.” Either way, there is volatility. One can say this proves that gold is volatile, or that the dollar is. But either way, one is not making an argument as to which is the objective measure of value. That argument comes from stocks to flows and marginal utility.

We will look at what happened this week, below under the respective sections for gold and silver. Groceries (i.e. purchasing power) also dropped out of Treasury bonds. They even leaked slowly out of that value store-celèbre: bitcoin. Some of them spilled into US equities. But even the euro lost some purchasing power relative to the dollar.

As an aside, in physics there is a law that says there must be conservation of energy in a closed system. Energy can be transferred from one body to another. Or change in form from kinetic to potential energy. But it does not go come into, or go out of existence.

In purchasing power, unlike in physics, there is not conservation of groceries. Groceries, it seems, can come into existence if all or most assets go up. And can go out of existence if they go down. Everyone loves when groceries are created (seemingly) ex nihilo, and hates when they (appear to) disappear into the aether from which they (apparently) sprang.

 

Fundamental Developments

Anyway, something unusual happened this week. We will look at that 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). The ratio rose sharply this week.

 

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. It rose this week.

 

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

 

With the rise in the price of the dollar (i.e., the fall in the price of gold) Monday through Thursday, there is a clear increase in scarcity (i.e., a rise in the co-basis).

Friday is something else. We see a massive jump in the basis and a drop in the co-basis. Remember, the basis is a spread. It is the difference between future and spot prices. A rising basis means the price of the future is higher, relative to spot.

The basis is how we measure abundance, and the co-basis is how we measure scarcity. The reason is that a high-enough basis means there is enough of the commodity that the warehouse-men can buy it, to carry it in the warehouse. That is, buy spot and simultaneously sell a futures contract.

They pocket this spread, minus the cost of storage and insurance, and interest. If this spread is too small (or negative), then the commodity is too scarce and the market is signaling to the warehouse-men not to carry it (or even to de-carry it, in the case of a positive co-basis).

So on Friday, it appears that the basis abruptly jumped. That would mean gold suddenly became more abundant on the market. Since the price fell that would mean lots of physical metal was dumped on the market.

Let us take a look at the actual bids and offers for an hour period on Friday. The period of interest is from just before 3:00 PM until just after 3:40 PM.

 

Gold spot bid and ask and December futures bid and ask, Friday afternoon – the time period in which spot prices moved in almost linear fashion rather than tracking futures prices is suspect. This is simply not how spot gold prices normally behave. [PT]

 

There are two take-aways from this. One, always drill down until you have a clear picture. And do not assume from high level or macroeconomic aggregate data that you know what is the cause and what is the effect. Especially if something which normally moves smoothly as the basis does changes behavior and most especially if it moves opposite to the expected direction.

Two, this is either a data or a networking glitch. Either the data is wrong, or the network somehow delayed or otherwise corrupted it. The spot price looks unnatural, and clearly is not in sync with the futures price the way it normally is. Note that this period includes the PM gold fix.

We must reject this data.

The Monetary Metals Gold Fundamental Price, was down $4 this week (to Thursday, which we will treat as the end of the gold week due to the above data problem), to $1,481.

Now let’s look at silver.

 

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

 

The problem we saw in gold did not show up in silver. The silver data is fine. The December co-basis rose very sharply again this week, though the silver basis continuous rose by a much more modest amount. This is the temporary backwardation of the expiring contract, not a signal of strong market fundamentals.

The Monetary Metals Silver Fundamental Price fell by just 18 cents, a little move in a big price move week, to $16.47. What happened is that the market price (mostly) caught down to the fundamental price.

 

© 2019 Monetary Metals

 

Charts by stockcharts, 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.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Is the Fed Secretly Bailing Out a Major Bank?
      Prettifying Toxic Waste The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance?  So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?   The yield-chasing hamster wheel... [PT]   Thus, smart fellows go after it; pursuing financial innovation with unyielding devotion.  The underlying...
  • Japan's Yield Curve Control Regime is Coming to America
      Monetary Lunacy, Nipponese Version Earlier this month, Bank of Japan (BOJ) Governor Haruhiko Kuroda commented that Japan’s central planners are considering a 50-year government bond issue as a long-term means of putting a floor under super-long interest rates.  How this floor would be placed is extremely suspect; we will have more on this in a moment.  But first, the dual benefits – according to Japan’s central planners...   Kuroda-san: the man with a plan, or...
  • Gold, Togas and Very Fine Suits - Precious Metals Supply and Demand
      Yields and the “Everything Bubble” Last week the price of gold was up $9, and the price of silver was up $0.18. This week, our thought turns to a cherished old saw. Gold bugs often tell us that the purchasing power of gold is constant. An ounce of gold could have purchased, they say, a fine toga in Roman times. Just as it could buy a fine suit today.   This magnificent toga will set you back an ounce, pilgrim. Just think of the impression you'll make....
  • Repo Market, QE4 (a.k.a. Not QE), the Fed and Gold
      Incrementum Advisory Board Discussion of 23 Oct 2019 In late October the Advisory Board of the Incrementum Fund held its quarterly meeting (a transcript is available for download at the end of this post). This time the board was joined by special guest Dan Oliver, the manager of Myrmikan Capital and president of the Committee for Monetary Research & Education.  Myrmikan inter alia publishes excellent and quite original research on gold which we hereby highly...
  • Eating the Seed Corn - Precious Metals Supply and Demand
      Misguided Incentives The price of gold subsided a few bucks, and the price of silver blipped a few pennies. Not much action last week, groceries neither pumped into nor drained out of this asset class. Those who look to exchange capital goods for groceries need to find a different asset.   The best-laid plans... [PT]   Not even the S&P 500 Index provided a gain in groceries this week. It certainly wasn’t the much-vaunted store of groceries, Bitcoin, which...
  • The Credit Market Powder Keg
      Credit Market Bifurcation By all accounts, credit markets remain on fire. 2019 is already a record year for corporate bond issuance, beating the previous record set in 2017 by a sizable margin. Demand for the debt of governments and government-related issuers remains extremely strong as well, despite non-existent and often even negative issuance yields. Even now, with economic activity clearly slowing and numerous  threats to the post-GFC recovery looming on the horizon, the occasional...
  • The Fed’s Answer to the Ghastly Monster of its Creation
      The Bubble Machine The launch angle of the U.S. stock market over the past decade has been steep and relentless. The S&P 500, after bottoming out at 666 on March 6, 2009, has rocketed up over 370 percent. New highs continue to be reached practically every day.   S&P 500 weekly, since the low of 2009. A party of roaring 20s proportion in terms of duration, extent and end point valuations (a post-war inflation episode triggered a devastating bear market from November...
  • Gold Moves from Vault A to Vault B - Precious Metals Supply and Demand
      Poland's Gold and the Conspiracy Theorists The price of gold was up enough to buy a bottle of Two Buck Chuck wine, and the price of silver was up enough to buy a wooden nickel (well, not enough to buy a real nickel nickel).   Poland's gold bars are packaged by employees of G4S International Logistics to be transported from London to Poland. Poland's gold was originally transferred to London at the beginning of WW II, when Stalin and Hitler invaded and partitioned the country...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!