Relative Performance

Again, we had another big drop in the dollar this week. No, we don’t mean against the dollar derivatives known as the euro, pound, etc. We mean by the only standard capable of measuring it: gold. The dollar fell 1.4 milligrams, to 25.1mg gold. Or, if you prefer, 0.1 grams of silver.

For some reason, it’s obvious when the price of gold in Zimbabwe goes up from Z$118,000,000 to Z$123,700,000 that Zimbabweans are not getting rich. But when the price of gold rises from US $1,118 to $1,237, as it did over the past two weeks, people celebrate. However, gold does not go anywhere, it’s the dollar that mostly goes down. It can go up too, as it did from 2011 through 2015. And now, it seems it’s time for the downward trend to resume for a while.


20081202_zimbabwe_inflationOn the way to buy a helping of miliepap (maize porridge) in Bulawayo in late 2008.

Photo credit: Tsvangirayi Mukwazhi / AP)


Of note, silver went up less than gold. Doesn’t everyone know that when gold goes up, silver goes up more? Especially when gold goes up a lot. This is one of those things that you cannot understand, if you think the dollar is the meter stick. If the dollar is the stable unit of measure, then there’s no explanation for this retrograde motion in the two metals.

Astronomers struggled similarly with retrograde motion so long as they believed that the Earth was the reference point, and it was the sun and planets revolving around Earth. Once they realized that the Earth went around the sun like all the other planets, things got simpler.

It’s the same with the dollar revolving around gold. It’s simple to explain why silver is underperforming gold. Silver is going down, measured in gold terms. There is no contradiction if both the dollar and silver are going down. There’s even a logic to it, if industrial activity and credit are contracting, it would make sense, wouldn’t it?


Fundamental Supply-Demand Developments

Anyways, this was a big week in the prices of the metals. We’re sure everyone is dying to know what is driving these moves. Read on for the only true picture of the gold and silver supply and demand fundamentals…

But first, here’s the graph of the metals’ prices.


Chart-1-pricesThe prices of gold and silver – click to enlarge.


We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.


Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio was volatile this week too, but it ended up.


Chart-2-gold-silver-ratioGold-silver ratio – click to enlarge.


For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.


Here is the gold graph.



Chart-3-gold basis and co-basisGold basis and co-basis and the dollar price – click to enlarge.


Well, look at that!

There was a gigantic drop in the price of the dollar. We had to change the scale on the chart to accommodate the green line, which would otherwise have fallen off the bottom. But the scarcity of gold (i.e. the cobasis, the red line) did not fall proportionally. It fell, but not the way the price of the dollar did (i.e. the way the price of gold, measured in dollars, rose). The chart therefore understates the drop in the dollar relative to the drop in scarcity.

Last week, the gold price jumped $71 and the cobasis fell from minus 8 basis points to minus 14. This week, the gold price rose almost as much, and the cobasis fell to minus 24bps. These are not especially big moves.

Think of the Sherlock Holmes story, by Sir Arthur Conan Doyle, Silver Blaze. There was a dog in the story that famously did not bark in the night. Well, the gold cobasis did not bark at the rise of the gold price.

Along with the market price, the fundamental price that we calculate based on our proprietary model shot up as well. It’s now about $1,450, up over $200 in the last two weeks.

While we’re not yet alarmed that gold could be withdrawing its bid on the dollar, we would expect the trend of rising gold prices to continue. Unlike the old and longstanding trend, of rising abundance with rising price and rising scarcity only with falling price, this new pattern is a distinct change in the market.

This does not mean that there can’t be corrections along the way. Trade carefully.

Now let’s look at silver.


Chart-4-Silver basis and cobasisSilver basis and co-basis and the dollar price – click to enlarge.


In silver, we had the opposite chart scaling problem. The dollar did not fall enough to require us to lower the bottom of the graph (still at 1.75g). However, we had to lower the bottom for the freefalling cobasis (scarcity) quite a lot.

The cobasis fell from -93bps to -235. Totally off the charts (to abuse a pun that you had to know was coming). We also had to increase the ceiling, for the basis, which rose from -28bps to +101bps. Yes, that’s right folks, there is now contango in March silver!

These are big moves, and they are in the opposite direction than in gold. At the same time that gold outperformed silver.

It is also worth noting that we are at or past the point where we would normally switch from the March to the May silver contract. Why?

The contract roll pushes the basis down and the cobasis up. This is because naked longs have to sell, which means they dump the expiring contract on the bid, pushing it down relative to spot. The typical behavior as a contract heads into expiry—more so for silver than for gold, and earlier too—is basis dropping off the bottom of the chart and co-basis rising into temporary backwardation. Incidentally, this is one proof that manipulation is not occurring as commonly asserted—naked short selling.

Not this time. The buying of silver futures—which means leveraged speculators—was so ferocious this week that it overcame the inherent tendency of falling basis and rising co-basis as the March contract rapidly approaches First Notice Day.

Despite all this, our fundamental price of silver did rise. It’s now almost $14.90.

Should silver speculators take optimism that the fundamental price is rising? We will say maybe for a third week in a row. They should also note that the market price has gotten ahead of the fundamentals. Again.


Charts by: Monetary Metals


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!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!


Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 5-cotmmrangegc03Ganging Up on Gold
      So Far a Normal Correction In last week's update on the gold sector, we mentioned that there was a lot of negative sentiment detectable on an anecdotal basis. From a positioning perspective only the commitments of traders still appeared a bit stretched though, while from a technical perspective we felt that a pullback to the 200-day moving average in both gold and gold stocks shouldn't be regarded as anything but a normal - and in this case actually long overdue -...
  • gold_bullionGold Sector Correction – Where Do Things Stand?
      Sentiment and Positioning When we last discussed the gold sector correction (which had only just begun at the time), we mentioned we would update sentiment and positioning data on occasion. For a while, not much changed in these indicators, but as one would expect, last week's sharp sell-off did in fact move the needle a bit.   Gold - just as nice to look at as it always is, but slightly cheaper since last week. Photo via The Times Of India   The commitments of...
  • wryAustralian property bubble on a scale like no other
      Australian property bubble on a scale like no other Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs:   Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included:    the record run up in commodity prices and subsequent correction;  the associated...
  • urban_ii_croppedPope Francis: Traitor to Western Civilization
      Disqualified There has been no greater advocate of mass Muslim migration into Europe than the purported head of the Catholic Church, Pope Francis.  At a recent conference, he urged that “asylum seekers” be accepted, “through the acts of mercy that promote their integration into the European context and beyond.”*   Before we let Antonius continue with his refreshingly politically incorrect disquisition, we want to remind readers of two previous articles that have...
  • 9-market-internalsBubble Dissection
      The Long Term Outlook for the Asset Bubble Due to strong internals, John Hussman has given the stock market rally since the February low the benefit of the doubt for a while. Lately he has returned to issuing warnings about the market's potential to deliver a big negative surprise once it runs out of greater fools. In his weekly market missive published on Monday (entitled “Sizing Up the Bubble” - we highly recommend reading it), he presents inter alia the following eye-popping...
  • spankinggoodtimeUS Stock Market - a Spanking May be on its Way
      Iffy Looking Charts The stock market has held up quite well this year in the face of numerous developments that are usually regarded as negative (from declining earnings, to the Brexit, to a US presidential election that leaves a lot to be desired, to put it mildly). Of course, the market is never driven by the news – it is exactly the other way around. It is the market that actually writes the news. It may finally be time for a spanking though.   Time for some old-fashioned...
  • andy-duncan-and-claudio-grassA Looming Banking Crisis – Is a Perfect Storm About to Hit?
      Andy Duncan Interviews Claudio Grass Andy Duncan of has interviewed our friend Claudio Grass, managing director of Global Gold in Switzerland. Below is a transcript excerpting the main parts of the first section of the interview on the problems in the European banking system and what measures might be taken if push were to come to shove.   Andy Duncan of (left) and Claudio Grass of Global Gold (right)   Andy Duncan: How do you see the...
  • fischersDoomed to Failure
      Larded Up and Larded Over We’ve been waiting for the U.S. economy to reach escape velocity for the last six years.  What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out.  Unfortunately, this may not be possible the way things are going.   As Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went...
  • state_police_980_600_s_c1_t_c_0_0_1Are the Deep State’s Drones Coming for You?
      What’s Aleppo?   Look out kid Don’t matter what you did Walk on your tip toes Don’t try "No Doz" Better stay away from those That carry around a fire hose Keep a clean nose Watch the plain clothes You don’t need a weather man To know which way the wind blows – “Subterranean Homesick Blues,” Bob Dylan   The entrance to Baghdad's “Green Zone”. Photo credit: Karim Kadim / AP   DELRAY BEACH, Florida – Biggest foreign policy blunder...
  • speculatorInterview with Doug Casey
      Natalie Vein of BFI speaks with Doug Casey   Our friend Natalie Vein recently had the opportunity to conduct an extensive interview with Doug Casey for BFI, the  parent company of Global Gold. Based on his decades-long experience in investing and his many travels, he shares his views on the state of the world economy, his outlook on critical political developments in the US and in Europe, as well as his investment insights and his approach to gold, as part of a viable strategy for...
  • larry-1Meet Your New Stimulus Allocation Czar
      March Towards Midnight The march towards midnight is both stirring and foreboding.  Like a death row inmate sitting down to savor his last meal, a grim excitement greets the reality of impending doom.  Thoughts of imminent mortality haunt each bite.   Tic-toc, tic-toc...   As far as the economy’s concerned, there’s no stopping its march towards midnight.  The witching hour’s rapidly approaching.  We intend to savor each moment and make the best of...
  • walmart-st-augustine-flaEvacuate or Die...
      Escaping the Hurricane BALTIMORE – Last week, we got a peek at the End of the World. As Hurricane Matthew approached the coast of Florida, a panic set in. Gas stations ran out of fuel. Stores ran out of food. Banks ran out of cash.   A satellite image of hurricane Matthew taken on October 4. He didn't look very friendly. Image via   “Evacuate or die,” we were told. Not wanting to do either, we rented a car and drove to Maryland. “We’ll just...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank




Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


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

Buy Silver Now!
Buy Gold Now!