Monetary Metals's blog

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Monetary Metals' views on Steve Saville's fundamental gold model which is based on (1) the real interest rate, (2) the yield curve, (3) credit spreads, (4) the relative strength of the banking sector, (5) the US dollar’s exchange rate, (6) commodity prices, and (7) the bond/dollar ratio.

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One would expect Gordon Brown's sale of the UK's gold would results in gold becoming abundant. However looking at the gold basis and cobasis during that period we find that gold was becoming less abundant and scarcer, peaking at significant scarcity and backwardation.

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There is a often-promoted plan to grow your wealth based on the claim the dollar will collapse:

Phase 1: You gotta buy gold.
Phase 2: Price goes up
Phase 3: Profit!

This is a bit reminiscent of the underpants business model on South Park. South Park of course showed phase 2 as “???” but the analogy holds.

The story switches midway from the-dollar-will-collapse to gold-will-go-up. In fact, these are the same thing. It is important to realize because a higher price of gold does not make you richer. Aside from being wrong as a matter of fact, it is an example of dollar thinking. It comes from the belief that gold is to be sold. That is not historically how people thought about it. Gold is money and those who have it should seek to earn a return on it, not sell it.

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Last week we noted that traders couldn't agreen on how the developments in France will affect gold and silver. It didn’t take too long for a resolution and for the speculators to get flushed.

Silver has been falling for going on one year, but clearly since March 1. After one last hurrah at the end of March, it has been taking the elevator down. And by its fundamentals it should be quite a bit lower—0.0125. In any case, we are interested in watching what the fundamentals of the metals are doing.

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Gold and silver went up the dollar went down, +$33 and +$0.53 -64mg gold and -.05g silver. This Report looks into the market to understand its fundamentals, that is, where the price should be if physical metal were to clear based on supply and demand.

Of course, two factors make this very interesting. One is that the speculators use leverage, and they can move the price around. At least for a while. The other is that the fundamentals change. There is no guarantee that the prices of the metals will reach the fundamental price of a given day. Think of the fundamentals as gravity, not the strongest force in the system but inexorable, tugging every day.

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Last week, we discussed the growing stress in the credit markets. We noted this is a reason to buy gold, and likely the reason why gold buying has ticked up since just before Christmas. Many people live in countries where another paper scrip is declared to be money. Most of the time, most of these people buy dollars as the escape hatch from their native currencies.

They buy the dollar first, and gold (for now) is a distant second. That leads to the question of silver. Do they buy silver in equal measure as gold, or is silver a distant second to gold, as gold is a distant second to the dollar?