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.




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