Waiting for Permanent Backwardation 

The price of gold dropped 9 bucks, while that of silver rose 3 cents. Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming. We say it is certain (unless we can avert it by offering interest on gold at large scale). They ask is it imminent, and we think this is with a mixture of fear and longing for a higher gold price.

 

Lettuce hope this treasure is not cursed… but it probably is. [PT]

 

We say well yeah that will bring a much higher gold price (perhaps it will hit some of the gold bug predictions, or perhaps it will go off the board before getting that high) but be careful what you wish for. And it’s not imminent. We will have a graph below that gives it some perspective.

In the meantime, we all watch the price of gold and maybe trade it when there’s a clear opportunity. Speaking of which, we will show the only true picture of the fundamentals of supply and demand in gold.

 

Fundamental Developments

First, here is the chart of the prices of gold and silver.

 

Gold and silver priced in USD

 

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It fell this week.

 

Gold-silver ratio, bid and ask

 

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

 

Gold basis, co-basis and the USD priced in milligrams of gold

 

The price of gold fell slightly (which means the dollar rose, as measured in gold). And with the price drop comes an increase in scarcity (i.e. the co-basis, the red line). Alas, this is just the near contract which is already under selling pressure as it expires in a few weeks. Farther contracts do not show an increase in scarcity, but a slight decrease (not a sign of imminent backwardation).

Here is a graph of the gold term structure. Note no backwardation, and each farther contract has a higher basis (which is normal).

 

Gold term structure – no backwardation in sight yet

 

The Monetary Metals Gold Fundamental Price fell $41 this week to $1,497. Now let’s look at silver.

 

Silver basis, co-basis and the the USD priced in grams of silver

 

In silver, not only did the price rise (a few pennies) but scarcity increased in the near and farther contracts. So it should not be a surprise that the Monetary Metals Silver Fundamental Price rose 20 cents to $17.69.

Here is a graph of the silver term structure.

 

Silver term structure – nothing out of the ordinary.

 

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.

 

 

 

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Dear Readers!

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One Response to “Fear and Longing – Precious Metals Supply and Demand”

  • Galactus:

    “Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming.”

    I really appreciate that you guys seem to be explaining your terms lately when you write articles. I’m sure it gets monotonous for you, but it helps neophytes like myself.

Your comment:

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