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. [PT]


We don’t know where they do their shopping, but one can buy a fine suit for a lot less than $1,465 (one could also spend multiples of that for a very fine suit). In any case, the purchasing power of gold changed this week. Gold can buy 0.62% more fine suitage than it could last week.

The gold bugs also tell us that one reason to hold gold is that gold owners will be rewarded with more purchasing power. How one squares this circle with 2000 alleged years of constant purchasing power, we don’t know. We can only say that there are many forces that push prices up and down. That is, prices are not intrinsic to the money. They are not built-in to the money, but merely expressed in money.

There are no bags of groceries stored inside any asset. But if there were, some more of them leaked out of bitcoin this week. These groceries poured into US equities. The S&P confirms this strong economy, adding about another quarter grocery to the index. It is at a record high, over 31 groceries per unit of the S&P.


S&P 500 Index, weekly – still inflating with vigor. [PT]


A little-known fact (Keynes smirked that it will not be observed by one in a million people) is that the more groceries are pumped into a yielding asset, the lower the yield is driven. Yield is the inverse of price. This is great for those who sell the asset, as the buyer forks over a greater amount of capital for him to spend. But terrible for savers and pension funds, whom Keynes thought were function-bereft parasites to be euthanized.

So long as asset prices are rising, most people are happy to cheer the process on. 999,999 out of a million people, at first estimate.

They call it a strong economy. The conversion of one party’s wealth into another’s income, to be spent — while adding jobs and increasing GDP — does not make for a strong economy. Is it a bubble? Is there an everything bubble? We don’t think the concept quite applies.

There are arbitrage mechanisms between the market rate of interest and the yield on all assets. As the interest rate falls — which is not a bubble — then the yield on all other assets drops.

If the market interest rate is 2%, then you won’t be able to buy a $100,000 property and make $10,000 a year, which is a yield of 10%. If you could, then someone would borrow $100,000 at 2% to buy that property. This would push up its price. The next investor would do it. Until the price was, say, $333,000, making the yield 3%.

The same is true for stocks. If the S&P has a dividend of $57.22, and its price is $3,115 then its dividend yield is 1.8%. That is actually below LIBOR. It is the yield on the 10-year Treasury. Equities carry a risk that treasuries do not. So the yield should be higher. On the other hand, people can get excited about equities. They can believe in a strong economy and therefore further gains in equity prices. So they can bid up the price / push down the yield to the level of treasuries or beyond. Which is where we are now.


Keynes with his book. Would he be finally happy now? We are not sure if the “rentiers” have really  been euthanized, but savers definitely have been. A great many rent-seekers seem to be doing just fine. [PT]


Could there be another round of borrowing to consume that will drive earnings higher, thus yields higher, thus a further rise in prices / drop in yield? There could. Would we bet on it? We would not. It has been a very long boom and consequent bull market. Enormous amounts of capital have been consumed. It will have to be written off sooner or later, but right now this phantom capital commands a high valuation.

We don’t know how to account precisely for the synergistic effects of falling interest rates:


  1. borrowing to consume
  2. and liquidating assets to consume
  3. which fuels earnings
  4. which spurs capital investment
  5. which adds to employment and spending
  6. which fuels earnings
  7. and rising asset prices
  8. go to 1


We just know that the effect is significant. And that it will reverse sooner or later. And when it does, people will turn to gold as the one financial asset without counterparty risk. And not subject to earnings expectations.


Fundamental Developments

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 fell slightly 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


Last week, there was a great anomaly in the gold basis and co-basis. You can see the big spikes up in the blue line, and down in the red. This week, the anomaly disappeared and the normal trends for those lines continued.

That is, the abundance of gold (i.e., the basis) is falling, and the scarcity (i.e., the  co-basis) is rising. We put little X’s where the real values for both indicators likely should have been on Friday.

This, of course, is the December contract, now close to expiry. As each contract approaches this point, speculators must close their position in that contract. If they want to keep their position, they can trade the next contract month.

The gold bugs believe the banks are short speculators. And they often discuss what would happen if the longs all stood for delivery. In this view, banks would have to buy the expiring contract, as they cannot deliver the metal. And the longs all have the option of paying the cash to take delivery. If all this were true, the price of the December contract would be rising right now.

In fact, the banks are arbitragers. They have no urgency. But the longs are mostly naked, they have not got the cash to take delivery of the metal. So the longs are selling, which we observe as a falling basis (which is essentially the futures price minus the spot price).

Here is the chart of the gold basis continuous. It does not show the same apparent trend of rising scarcity since October.


Continuous gold basis, co-basis and the USD priced in milligrams of gold – a slightly different picture. [PT]


The Monetary Metals Gold Fundamental Price was down $16 this week to $1,465.

Now let us look at silver.


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


There is a sizable temporary backwardation in silver. With its lesser liquidity, the forced selling of longs drives the price of the expiring contract down.

The Monetary Metals Silver Fundamental Price fell by another 15 cents, to $16.32.

People have no need of gold and silver to increase their purchasing power. So far, equities are doing that job just fine.


© 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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