Big Moves, Widening Spreads
The big news this week was the drop in the prices of the metals (though we believe that it is the dollar which is going up), $57 and $1.81 respectively.
Despair at the Unjustly Injured Gold Bugs Anonymous meeting… [PT]
Of course, when the price drops the injured goldbugs come out. We have written the authoritative debunking of the gold and silver price suppression conspiracy here. We provide both the scientific theory and the data. So we won’t say anything more about it today.
On 17 Feb, we wrote about the widening bid-ask spread in the spot markets for gold and silver. The spread in silver was around 2 cents (up from where it had been humming along at ½ cent until about a year ago), then just over 1 cent. By mid-February, it was over 1.5 cents.
We said:
“We would expect widening spreads to cause / be caused by lower volumes. Whether we get rising prices or falling prices, as a result of this, remains to be seen.”
The spot silver bid-ask spread closed the week at well over 3 cents. Here is a graph zoomed in to show just the last month.
Spot silver, bid-ask spread: blowing out on Friday. [PT]
We emphasize that one should analyze spreads rather than look too much at price charts. When a spread changes, it is telling you something.
When the bid-ask spread widens, it is telling you that liquidity is drying up. Suppose you run a used-car lot. Bill Average comes in with a 2016 Honda Accord with 50,000 miles on it. You might give him $19,000 for it, if you know that later in the day you will likely have a buyer who pays you $20,000.
But when Eric Atypical comes in with a 1968 Camaro that will also sell for $20,000 — in a month or three — you can’t pay $19,000. You might bid $13,000.
It is pretty easy to see why he dealer lowers his bid when there is uncertainty about when he can sell it. It is a bit harder to understand why the offer is raised. So let us look at two reasons for that.
The first applies to a used-car dealer. Suppose the supply of 2016 Honda Accords is intermittent. For example, Honda has a sale and gets lot of people to buy a new car. So many dump their old cars. But a few months after that, there are not many more used cars coming to the market. If you have one or two in stock, you might mark up the price.
We will look at whether this is occurring in the silver market, below.
Silver Market Makers
But first, consider the market maker for precious metals. He takes no price exposure, hedging all of his trades (i.e., when he buys a bar of metal he simultaneously sells a futures contract. When he sells the bar, he buys back the future he sold short). Or, to be more technically precise, we should say that he seeks to take no price exposure.
Of course, the spot and futures trades may not be executed at precisely the same time, due to internal processes or the market. There is always a short window of time, during which the market maker has price exposure.
If market conditions cause this window to lengthen, or if price volatility during this window increases, the market maker must lift his offer price (and drop his bid). His spread must cover the risk of execution slippage on his hedge as well as make a profit.
Finally, the market maker has costs of doing business. These include compliance, regulatory capital requirements (e.g. Basel III), and of course the cost of credit to finance his metal positions. If these costs rise, then he has no choice but to either widen his spread or exit the business. A number of banks have exited in recent years.
Let us take a look at the Friday intraday silver price and the May basis. The price fell over a buck, from $17.74 to $16.67. Clearly the market action was the selling of something. Was this something futures or spot metal?
Last week Friday: silver price intraday (gray line) vs. May silver basis (blue line) [PT]
With the price move from around $17.25 (around 13:30 GMT) to $16.60 (16:00 GMT), the basis drops from a small positive number to -0.65%. For reference, on 14 Feb, it was 0.91%. That is a big drop in basis—from contango to backwardation—as the price dropped a buck.
The basis shows us that the price move was driven by the selling of futures. That is, speculators are repositioning (either by choice or perhaps under stress elsewhere in their portfolios).
Recall the carry trade: the market maker buys a bar of metal and sells a future against it. But consider it from the perspective of the buyer of the future. He buys a contract, and in order to sell it to him, the market maker buys a bar and warehouses it.
When that futures contract owner decides to sell it, the bank reverses the trade. It buys back the contract, and sells the bar. So the metal comes back out of the warehouse.
It is sold to someone else, not seller of the future obviously. And not the market maker, obviously. And not likely another market maker, assuming that the selling of futures is pervasive.
Another way of saying that the metal is coming out of the warehouse is that the inventory levels of the market makers are dwindling. Could that cause them to raise their offers? At the same time that they may be dropping their bids because of uncertainty about the buyer.
Whatever the cause, we predicted a likely price move. We got it in spades.
Our next prediction is twofold. One, if stocks continue to crash (and Treasury yields continue to drop) then the price of silver could drop a bit further. But unless more silver metal comes to market and the basis recovers, backwardation should provide increasingly firm support as the price declines.
If we had to guess, we would not expect silver stackers to panic and sell their metal at this point. Those who own the metal today likely hold it for reasons other than false certainty of endless gains (which did occur at certain times in the past). However, if economic hardship hits them, they may be forced to unload silver to put food on the table.
Empty Malls, Seafood Discounts and Treasury Yields
This may seem premature in the US, but we will write about our observations in Asia. Here is one picture I took in the virtually empty Jewell Mall attached to Chiangi Airport in Singapore.
Alaskan crab sells at a surprisingly large discount in Singapore… [PT]
No one discounts seafood that is kept live in a tank until the moment you order it. They just buy less from their suppliers. Except under one condition. When they are surprised by a sudden collapse in demand. Chiangi and Jewell are normally quite crowded. Now, they are eerily empty. Eerie like 2009.
Perhaps this restaurateur (and many others in that mall) is selling metal in order to keep the lights on, and wait for traffic to return.
We need to say two things about the breathtaking plunge in 10-year Treasury yields. They closed 2019 at 1.9%. They closed February at 1.1%. That is, they dropped 0.8 percentage points. That is, in two months, over 40% of the yield has been sucked out of it.
Two, this is not due to the corona-virus. The yield has been evaporating from bonds for 39 years, and the present leg down began in November 2018 — over a year ago. If your favorite economist had been calling for rising interest rates (as a rebellion by investors against rising consumer prices), perhaps it is time for a new economist.
The US is traveling down the trail blazed by Switzerland, Europe, and Japan. America is just lagging behind. Its economy is a bit less phlegmatic. Thus, there is a bit higher bid on the interest rate. The trend is clear. Demand for credit does not come in size, except on a down-tick in rates.
© 2020 Monetary Metals
Charts by 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
Most read in the last 20 days:
India’s Experiments with COVID-19
Shooting from the Hip [ed. note: the tweets linked below mainly show videos from various lockdown phases] Reminiscent of his demonetization effort in 2016, on 24th March 2020, Indian Prime Minister Narendra Modi, appeared on TV and declared an immediate nationwide curfew. No one was to be allowed to leave wherever he or she happened to be. All flights, trains (after 167 years of continual operation) and road transportation came to a complete, shrieking...
Support Acting Man
Search Site
Austrian Theory and Investment
Archive
Acting Man Classics
- The Potent Director's Fallacy
- Money and Credit – There Is A Difference
- Quantitative Easing Explained
- The Production Structure
- The Potent Director's Fallacy
- Communism - the Failed Experiment
- It’s Official: If You Question Authority, You Are Mentally Ill
- The Greatest Racket of All Time
- How Catastrophic Would a Break-Up of the Euro Zone Be?
- Why Does Fiat Money Seemingly Work?
- Misconceptions About Gold
- Mapping the Conflict in the Ukraine
- Chess, Poker and Trading
- The Problem of Fractional Reserve Banking, Parts 1-3
- The Gold Standard Debate
- The Crisis Eats Its Way Into The Core
- The Methodical Approach to Apocalypse
- Marijuana Legalization Begins to Undermine Drug Cartels
Michael Pollaro’s Charts
-
The Contrarian Databank
 
- Austrian Money Supply
- Federal Reserve Balance Sheet
- US Government Debt Monetization
- US Government Finances  
 
Acting Man Reads
-
Economy & Markets:
- Ludwig von Mises Institute
- Mish Talk - Global Economic Trend Analysis
- Lew Rockwell
- Bachheimer - Thinking outsuíde the Box
- Robert. P. Murphy's Personal Blog
- The Automatic Earth
- Forest for the Trees
- Proven & Probable
- Hans-Hermann Hoppe
- GloomBoomDoom - Marc Faber
- Of Two Minds - Charles Hugh Smith
- Variant Perception
- Safe Haven
- Zero Hedge
- Value Walk
- Financialsense
- Insider Monkey
- Summa Anthropica - Human Action Comics
- Gold Broker
- AnCaps
- Viennacapitalist
- staatsstreich.at
- Krugman-in-Wonderland
- Now and the Future
- 2KReviews.com
- Professor Piggington's Econo-Almanac for the Landed Poor
- Stefan Karlsson
- Kondratieff Wave
- 321 gold
- GoldSeek
- Oilprice.com - Crude Oil & Commodity Prices
- The Prudent Investor
- Gresham's Law
- Asianomics
- Canadian Insider
- Nomad Capitalist
- Querschüsse
- Dimitri Speck's Seasonal Charts
- Gold Silver Worlds
- FocusEconomics
- Economic Man
- GlobalSlant
- Crackerjack Finance
- A Marketplace of Ideas
- The Liberated Photographer
- Kinsey Barnard's Photos and Real Life Adventures
- The Reference Frame
- Nicholas Lens' Music
- Chessbase News
- HL25 Records
- Fractal (Mandelbrot) Graphics
- Matthias Hauer - Cinematography and Photography  
 
General Interest:
 
Mish Talk
Categories
- Aggregated News
- Book Review
- Breaking News
- Central Banks
- Chart Update
- Commodities
- Credit Markets
- Crypto – Currencies
- Economic History
- Emerging Markets
- Euro Area
- History
- Human Condition
- Humor
- Miscellaneous
- Newsletter
- On Capitalism
- On Economy
- On Politics
- Periphery Watch
- Precious Metals
- Real Estate
- The Stock Market