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! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • safe spaceReality is a Formidable Enemy
      Political Correctness Comedy We have recently come across a video that is simply too funny not be shared. It also happens to dovetail nicely with our friend Claudio's recent essay on political correctness and cultural Marxism. Since this is generally a rather depressing topic, we have concluded that having a good laugh at it might not be the worst idea.   How to most effectively create a “safe space” on campus Cartoon by Nate Beeler   It is especially funny (or...
  • Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012. Gold imports by India, the world's biggest buyer of bullion, could rise on pent-up demand from jewellers after the federal government decided to scrap an excise duty on jewellery it imposed in March, the head of a trade body said on Monday. REUTERS/Ajay Verma (INDIA - Tags: BUSINESS COMMODITIES)Fresh Mainstream Nonsense on Gold Demand
      They Will Never Get It... We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our  article “Misconceptions About Gold”, or Robert Blumen's excellent essay “Misunderstanding Gold Demand”).  Sometimes it is a bit frustrating when we realize it has probably all been for naught.   Gold wants to know what it has done now... Photo credit: Ajay Verma / Reuters   This was brought home to...
  • fir wateringDrowning the Fir
      Presidential Duties Our editor recently stumbled upon an image in one of the more obscure corners of the intertubes which we felt we had to share with our readers. It provides us with a nice metaphor for the meaningfulness of government activity. First, here is a look at the picture – just quietly contemplate it for while and let it work its magic on you:   Yes, these two gentlemen are actually watering a tree in the middle of a downpour... Photo via...
  • swiss-cultureSwitzerland About to Vote on “Free Lunch” for Everyone
      Will the Swiss Guarantee CHF 75,000 for Every Family? In early June the Swiss will be called upon to make a historic decision. Switzerland is the first country worldwide to put the idea of an Unconditional Basic Income to a vote and the outcome of this referendum will set a strong precedent and establish a landmark in the evolution of this debate.   The Swiss Basic Income Initiative in a demonstration in front of parliament. As we have previously reported (see “Swiss...
  • Hollande 2The Wonder Years Are Over
      Everybody Is Unhappy PARIS – “France?” We were in a cab on the way from Charles de Gaulle Airport yesterday. We had innocently asked our cab driver how things were going in the country. He had some thoughts...   French president Francois Hollande: against all odds, he managed to attain the most powerful position in French society. And yet, even he is unhappy. Photo credit: Patrick Kovarik / AFP   “France is a mess. We have 5 million people unemployed. And...
  • mossack fonsecaGold – The Commitments of Traders
      Commercial and Non-Commercial Market Participants The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn't it obvious? Superficially, it sure looks that way.     As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended...
  • picture-social-contract-not-foundHeretical Thoughts and Doing the Unthinkable
      Heresy! NORMANDY, France – The Dow rose 222 points on Tuesday – or just over 1%. But we agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull.   Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly. Photo credit: David A. Grogan / CNBC   Speaking at an investment conference in New York last week, George Soros’ former partner...
  • ClintotrumpStaying Home on Election Day
      Pretenses and Conceits The markets are eerily quiet… like an angry man with something on his mind and a shotgun in his hand. We will leave them to brood… and return to the spectacle of the U.S. presidential primaries. On display are all the pretenses, conceits, and absurdities of modern government. And now, the race narrows to the two most widely distrusted and loathed candidates.   US election circus: Deep State Rep vs. Rage Channeller   The first, a loose...
  • Jackboot 2How the Deep State’s Cronies Steal From You
      Expanding in Ireland DUNMORE EAST, Ireland – We came down the coast from Dublin to check on our new office building. For this visit, we wanted to stay somewhere different than we normally do. So we chose a small hotel on the coast, called the Strand Inn.   Irish landscape with alien landing pads. Even the guys from Rigel II have heard about Ireland's corporate tax rate. Photo credit: Tourism Ireland   It is an excellent place for seafood and soda bread on a...
  • time100-grid-covers-whiteThe World's 100 Most Influential Hacks, Yahoos and Monkey Shiners
      Hacks and Has-Beens NORMANDY, France – What has happened to TIME magazine? Henry Luce, who started TIME – the first weekly news magazine in the U.S. – would be appalled to see what it has become.   Time cover featuring the sunburned mummy heading the globalist IMF bureaucracy (which inter alia advocates that governments should confiscate a portion of the wealth of their citizens overnight, even while its own employees don't have to pay a single cent in taxes). Once you...
  • YenThe Japanese Popsicle Affair
      Policy-Induced Contrition in Japan As we keep saying, there really is no point in trying to make people richer by making them poorer – which is what Shinzo Abe and Haruhiko Kuroda have been trying to do for the past several years. Not surprisingly, they have so to speak only succeeded in achieving the second part of the equation: they have certainly managed to impoverish their fellow Japanese citizens.   Shinzo Abe and Haruhiko Kuroda, professional yen assassins Photo credit:...
  • Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, December 18, 2015.  REUTERS/Toru HanaiKuroda-San in the Mouth of Madness
      Deluded Central Planners Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”.   BoJ governor Haruhiko Kuroda Photo credit:...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

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!
 

Oilprice.com