Gold and Silver Divergence – Precious Metals Supply and Demand

Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising.

Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it so.

 

Stalin regarded Pavlov’s psychological theories as compatible with Marxism and “dialectic materialism”. Soviet psychologists who championed competing concepts were reportedly often declared insane and involuntarily committed to a booby hatch. Pavlov meanwhile kept a secret stash of silver bars under the table in his lab, which his dog had conditioned him to buy (see photographic evidence of this counter-revolutionary activity above). [PT] – click to enlarge.

 

This will be a brief Report this week, as we are busy working on something new and big.

 

Fundamental Developments – Gold Scarcity Still Rising in Tandem with Prices

Below, we will show the only true picture of the gold and silver supply and demand fundamentals. But first, the price and ratio charts.

 

Prices of gold and silver – click to enlarge.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It rose slightly this week.

 

Gold-silver ratio – click to enlarge.

For each metal, we will look at a graph of the basis and co-basis 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 co-basis in red.

 

Here is the gold graph.

 

Gold basis and co-basis and the dollar price – click to enlarge.

 

Do we have rising price of gold, up $25 (i.e. falling dollar, from 26mg to 25.5mg gold)? Yes. Do we have rising scarcity of gold (i.e. the co-basis, our measure of scarcity)? Why yes, we do.

This resumes the pattern that began the last week of December. The price of gold made a low of $1,127 (i.e. the dollar made a high of 27.6mg). Since then, the price of gold has been rising (i.e. the dollar has been falling) while the scarcity of gold has been rising.

Not a lot. Not Defcon 5, gold is going to spike to $10,000 (i.e. the dollar is going to crash to 3mg gold). Not a big obvious crisis-type sort of move. Just a gradual move from -100bps to -68bps.

What makes it significant is that it occurred while prices were rising. Gold is becoming scarcer as its price rises.

So far, this move has been driven by buyers of physical metal. Our calculated fundamental price is up $40 to stay about $100 above the market price.

Now let’s look at silver.

 

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

 

In silver, there is quite a bit more volatility in the basis. And although the March co-basis is up, more distant contracts do not show the same move.

Our calculated fundamental price did move up a bit, by 15 cents. However, it did not keep up with the market move. So now it is basically even with the market price.

It turns out speculators did think that silver ought to outperform gold, and they tried. They caught up to and passed the buyers of physical metal.

We note that in the futures market, open interest in gold turned down sharply starting last week. However, silver open interest diverged, and continued to skyrocket.

 

Charts by: Monetary Metals

 

Image caption 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.

 

 
 

 
 

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.

   

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