Author Archives: Keith Weiner

     

 

 

Erroneous Analysis of Precious Metals Fundamentals

We came across an article at Bloomberg today, talking about silver supply troubles. We get it. The price of silver has rallied quite a lot, so the press needs to cover the story. They need to explain why. Must be a shortage developing, right?

At first, we thought to just put out a short Soggy Dollars post highlighting the error.

Then we thought we would go deeper. Here’s a graph showing the price action in silver since the beginning of the year, overlaid with our abundance indicator.

 

chart-1-abundance Silver price vs. silver abundance – click to enlarge.

 

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The Prices of Gold and Silver Drift Apart

Another interesting week, in that the price of silver separated from the price of gold. The former went no nowhere, while the latter gained over 4.5%.

We get the trading thesis, that if the precious metals are in a bull market, then silver should go up more than gold. Silver is the high-beta gold. It’s a smaller market, less liquid, and at the same time it’s the preferred vehicle for betting on a rising price.

 

Entering-The-MineInside the Sierra silver mine in Wallace, Idaho

Photo credit: silverminetour.org

 

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What Differentiates Gold from Silver?

Well that was an interesting week. Gold went down over thirty bucks and silver went up over thirty cents. How much longer can this silver rally continue in the face of gold’s non-participation? Will speculators really be comfortable bidding silver up to $20 while gold sits at $1200? Do the fundamentals support a higher silver price?

 

chart-1-June Gold future, 30 min.Gold, active June futures contract over the past week – click to enlarge.

 

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Tricky and Dangerous Assumptions

For at least a few weeks now, we have noticed a growing drumbeat from a growing corps of analysts. Gold is going to thousands of dollars. And silver is going to outperform. Reasons given are myriad. Goldman Sachs apparently said to short gold, so if one assumes that the bank always advises clients to take the other side of its trades — a tricky and dangerous assumption at best — then one should buy gold.

 

Goild conspiracyA metallic conspirator and his flying factotum…

Image via sceptic.com

 

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A Spot of Irrational Exuberance

There were some fireworks last week. Gold went up on Tuesday (it was a shortened week due to Easter Monday), from a low of $1,215 to $1,244 over the day, a move of over 2 percent. Silver moved from $15.02 to $15.44, almost 3 percent. What happened on Tuesday to drive this move down in the dollar? (We always use italics when referring to gold going up or down, because it is really the dollar going down or up).

 

Yellen_cartoon_03.17.2015_largeA bit of verbal puppeteering….

 

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Up and Down

Gold went down (as the muggles would measure it, in dollars). It dropped almost 40 bucks. Silver fell almost 60 cents. Since silver fell proportionally farther than gold, the gold-silver ratio went up.

Why do we keep reiterating that gold goes nowhere, that it’s the dollar which mostly goes down over long periods of time and sometimes up as in 2011-2015? Why do we insist that the dollar be measured in gold, and that gold cannot be measured in dollars the way a steel meter stick cannot be measured in rubber bands?

Some ideas that are impossible to understand using the dollar paradigm. For example, gold is in the process of withdrawing its bid on the dollar. This will have devastating consequences, which the word “reset” does not begin suggest. If the dollar is money, then this assertion — gold bids on the dollar — is incomprehensible. However, if gold is money then that makes the dollar just the irredeemable scrip issued by the Fed in order to finance its purchase of Treasury bonds. Who would be eager to trade his money to buy such scrip?

 

gia-vang-hom-nay-ngay-17-2-2016-3Photo via goudmunten.com

 

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Supply and Demand Report, 20 Mar, 2016

Early on Monday morning (Arizona time), silver began to rise. From its close on Friday of $15.46, it ran up to $15.82. Then it began to slide, eventually dropping to $15.17 by mid morning on Wednesday.

 

silver-surfer

Photo credit: Ethan Miller / Getty Images

 

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What Determines Wages

We’re all familiar with the Law of Supply and Demand. There is a supply curve that goes up as price goes up, and a demand curve that goes down as price goes up. It’s often drawn like this:

 

Supply-DemandStandard graphical depiction of supply and demand curves

 

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ECB Inspires Large Short Term Moves

On the week, the prices of the metals didn’t move all that much. However, the move around 6am (Arizona time) on Thursday is notable. The price of silver spiked up from around $15.12 to $15.64—3.4%—by around 8am. Twelve hours later, the price touched $15.73 before sliding off.

 

draghi_2547869bMr. Draghi, wagging his finger (general advice: always be careful with finger-wagging politicians and high ranking bureaucrats). [PT]

Photo credit: AFP

 

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Silver Rockets Higher

So the price of silver rocketed up 80 cents, while the price of gold jumped $37. Silver is now more expensive than it was two weeks ago; the price decline of last week was more than overcompensated.

This pushed the gold-silver ratio down about two whole points, with virtually the whole move on Friday.

 

silver rocket

 

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Accustomed to Speculation

Zero Hedge published an article on Canadian Bullion Services (CBS) last week. Other sites ran similar articles. The common thread through these articles, and in the user comments section, is that CBS is committing criminal fraud. Or, if not, then it’s a conspiracy by the Canadian government to confiscate gold. Terms like fractional reserve and re-hypothecation were dusted off for the occasion.

 

t-bill3-month t-bill rates: all the way to nada – click to enlarge.

 

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A Sharp Move

The gold to silver ratio moved up very sharply this week, +4.2%. How did this happen? It was not because of a move in the price of gold, which barely budged this week. It was due entirely to silver being repriced 66 cents lower.

 

chikago trading pitFutures trading pit in Chicago

Photo credit: Scott Olson / Getty Images

 

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