What Drives the Price of Gold and Silver?

Monetary Metals's picture

If there is a credible rumor that the Fed is planning to further extend its “Quantitative Easing”, how would you expect the monetary metals to react? Typically, the gold price would rise and the silver price would rise even more.  The question is why. 

Traders read the headlines and they know how the price “should” react to such news, and they begin buying. For a while, the prophecy fulfills itself. But then what happens next? It may take an hour or a month, but sooner or later some of the new buyers begin to sell. What can be bought on speculation using leverage must eventually be sold.  Traders who buy gold and silver futures think of their “profits” measured in dollars. They cannot profit from the rising gold price until they sell. So, sooner or later, they must sell. Alternatively, if the price goes down, they must sell because they are incurring losses at a multiple of the price drop due to their use of leverage.

Nearly all buyers of futures are speculators. They could be called “naked longs” because they have neither the intent nor the means to take delivery. Their predictable behavior when a particular contract heads into expiry has a characteristic behavior. One can see this in the gold and silver bases.

One way to debunk the “naked short seller” conspiracy theory is to watch the basis heading into First Notice Day. Naked longs must sell the expiring contract, and if they wish to remain long the metal, they must buy another farther-out contract. Right now, for example, we are in the late stages of “rolling” from the March silver contract to May (there were about 80,000 contracts open a month ago, and now about 30K).

Anyway, getting back to the topic, speculators are frequently driving up the price by buying news and rumors and almost as often driving down the price. In the short run, they can have an enormous impact on the price. But in the long run, they have almost none.

There are an estimated seven billion people on Earth. Most of them don’t read about the US stock market, the press releases from the Governor of the Bank of England, or the latest politics surrounding the appointment of a new head at the Bank of Japan. They don’t know how the price is supposed to move when earnings estimates for the S&P 500 are raised or lowered.

They are doing one of two things with physical metal. They are either slowly hoarding it, as the only safe store of wealth they can understand. Or they are performing arbitrage, each with his notion of the “right price”. When metal is priced lower than their threshold, these latter folks buy. When the price rises above, they sell. Most of them, of course, don’t even look at the price measured in dollars. They are using another currency, such as rupees.

The actions of the hoarders will sooner enough cause the final descent into permanent gold backwardation. But don’t count your paper “profits” just yet. This is not a time when gold owners get “rich”. Sure, the gold will have a high value indeed, though it may be worth your life to show anyone that you have it as occurred throughout history.

Permanent gold backwardation—the withdrawal of the gold bid on the dollar—will lead to bad times. Certainly, government policies are causing the capital base that supports our society to be hollowed out. If it can no longer support us, if the debt-based currencies no longer work, and if industries such as food distribution seize up due to lack of credit, then even the best case is pretty bleak.

For now, the actions of the arbitragers drive the price. Gold and silver are totally unlike any other commodities. Both metals have a stocks to flows ratio that is extraordinarily high. Stocks to flows is total global inventories divided by annual mine production. For gold and silver, this number is in the many decades. For other commodities, it’s measured in months.

All of this inventory is potential supply at the right price. If the price rises above the threshold set by a large number of owners, then metal comes into the market. If the price falls below this threshold (or the threshold ratchets up) then metal is taken out of the market.

The speculators can drive the price quite far in either direction, in the short term. But it is the hoarders and arbitrageurs who drive the price in the long term. A century ago, gold was worth about $20 an ounce. Now it is worth about $1600. This is another way of saying that the dollar has gone down to 1/80th its value. This trend is not going to end soon (or indeed end at all). But it does not move in a straight line, as these past few years have proven once again.

Wouldn’t it be nice to have an indicator that can help one determine whether hoarders and arbitrageurs are driving the price at the moment, or if it’s just the speculators again? This is precisely what the basis shows (among other things). In other words, are you buying your physical gold or silver into a speculative move (bad), or are your purchases part of a fundamentals-driven move (good)?

Monetary Metals is now publishing graphs of the basis for gold and silver along with our commentary. Click here to view the Last Contango Basis Report (free registration required).


© Feb 24, 2013 by Keith Weiner

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SAT 800's picture

Professional traders never, ever, discuss "what drives gold and silver prices"; this is strictly for the public; for amateurs. The price charts, with their volume and open interest graphs are reality; that's all there is; by the way; the bottom is in in gold and Silver you can buy with complete comfidence.

The Continental's picture

Here’s the way I look at it: there are two silver prices, the commodity price and the monetary price. The monetary price is multiples higher than the commodity price of today. But there is no monetary (circulating specie) silver extant. Because the tens of billions of ounces of silver that fed the sovereign coinage demand have been consumed and are gone, there is far too little silver to reinstate it’s monetary role at today’s commodity price. Concerning commodity silver, is the price suppressed? I’m not sure this is the right question to ask. As long as there is enough physical silver left over from industrial and fabrication consumption to satisfy investment demand, I would say silver is priced appropriately. But we enjoyed artificially low silver prices in the 1990s and 2000s decades because of the overhang of monetary silver dumped into the commodity silver pool. Today, the paper markets have managed silver quite tightly at the margin. Flows greatly exceed stocks. So it is difficult to buy physical silver in large (i.e. 1 million ounces) quantities. Some might accuse me of being bearish on silver price given my statements above. Nothing could be further from the truth. Silver’s fundamentals are just so bullish. The downside price risk is trivial, $1-2$ at most. But the upside potential is, IMHO, guaranteed. Silver long term is going higher, multiples higher. The only unknowable is the rate of its price ascent. Here are the forces that will push silver higher for years to come:


  1. Silver ore grades are collapsing at ~5-6% per year. Cost per ton of ore will double every decade, other inputs kept constant (not likely).
  2. Energy prices will trend higher for decades. Peak oil appears a reality. The boon that was shale and tar sands fossil fuels has been greatly exaggerated and is a Ponzi that will collapse. We are all Malthuseans now. Multiply the higher cost of energy times the inverse of silver ore grades to get a geometrically rising silver price for years to come.
  3. Two billion Chinese and Indians will enter the middle class over the next 2 decades. They will want all the conveniences and gizmos present day first worlders enjoy: that means a lot of silver will be needed, a lot!
  4. QE and competitive currency devaluations has gone international and will continue until either a systemic collapse (i.e. bond or currency crisis) or a world war. In the mean time, silver remains the poor man’s gold. Inflation and devaluation fears will drive increasing numbers of investors to silver.


The USGC estimates silver reserves to be exhausted in under 20 years. No, this does not mean we will run out of silver. What it does mean is that there will a day when whole mountains will be leveled to obtain silver at ore grade less than 0.05 ounces per ton (i.e. half a silver dime per ton) and landfills will become profitable silver resources. Why? Because we will have to have the silver, no matter what it costs or takes. I can easily envision silver in excess of $150 per ounce in 2013 dollars. And still, silver stocks will remain almost nonexistent as it will be impossible to accumulate large amounts of silver. Someday, silver will be a truly precious and rare resource akin to helium. Except silver is one thousand times more useful than helium. And helium makes for a lousy store of wealth!

vamoose1's picture

perhaps  i  need  to  get  out   more   but  thats  the  most   brilliant  post  i  have  seen    in  16  years  on  the    pm  internet    thank  you  so  much   wow  who    er    are   u

vamoose1's picture

in  40  years  at  the   german  drawdown  rate  they   maybe   get  their   stolen  gold  back.   how  many   ld  calls   did  the    ny  fed  get  after  that   sickening   weekend    after   60   countries   dixcover  their   gold  is   stolen by the   united   states  of   amerika ......  i  would    estimate60

you   entrusted   your    countries   gold   to  these    charlatans and  they   stole  it   from  you

   stated   us  debt      ostensibly   sixteen   six        what   sentient   person or   country would  hold   criminals   paper


    itss   over

Pseudo Anonym's picture

spot on

we enjoyed artificially low silver prices in the 1990s and 2000s

and we still do.  the paper market has serious imbalances in it

crzyhun's picture

How many of you bought gold last weeK??? Just asking...

silverserfer's picture

i panned about a gram on Saturday

cornflakesdisease's picture

I did.  Seemed like a good oppurtunity, especially when you plan to sell in 20 years.

cornflakesdisease's picture

I did.  Seemed like a good oppurtunity, especially when you plan to sell in 20 years.

strannick's picture

Author: 'Gold and silver are totally unlike any other commodities. Both metals have a stocks to flows ratio that is extraordinarily high'.

False for silver. The author just goes ahead stating opinion as fact, then leaving you a link at the bottom so you can sign up for his subscription service

He has a fairy tale view of silver and gold trading, and needs to sit down for a week going over GATAs extensive tomes, then acquainting himself with the details of the 3 pillars of Gold price suppression.

1. Central bank leasing

2. GLD


strannick's picture


Please give links to these industrial silver suppliers you mention. I'll be checking back in for them. The whole 'trust then verify' thing, yaknow? I'll follow up your forthcoming links, and post the findings on this thread. My buddy used to send old batteries to China and yes, they rip everything apart and sort it into piles, but Im not going to conclude from that that these supplies Szchenzen piles subvert commodities prices everywhere and arent included in their pricing. You saw where the US was exporting silver to China as per the Treasury reports from Dec. 2012. Seems strange that whereas the US imports everything under the sun FROM China, one of the few things they would be exporting TO China (along with Gold) is something you say they already have in abundance

Monetary Metals's picture

I don't normally respond to comments, especially negative ones. But in this case, I posted a response on January 1.


An Allegation of Plagiarism

ebworthen's picture

Glad I bought the dip in Au and Ag over the weekend.

jomama's picture

i can't make sense of the 'market' for gold and silver, all I know is i just traded 3150 bennybux for 100 oz. of Ag shinies on Saturday!

Super Broccoli's picture

this is bullshit, i've got another shorter explaination : price of gold is mainly depending on GLD paper

Harbanger's picture

Do you own the property or the time shares?  No time for broke niggers.

Mr. Hudson's picture

Buy! Buy! Buy! BUYYYYYYYYYYYYY!!!!!!!

Harbanger's picture

Better believe it Mr. Hudson, now's the time.  This is when weak hands lose their lunch money.

Jack Sheet's picture

Yeah well we all know what happened in the last tango (no con) in paris - the steamy scene utilising the dairy product, then Brando bares his ass in the bar. That's about the level of this post too.

Kassandra's picture

Getting over the flu, I turned on the shopping channels this weekend. Every single one is offering jewelry; semi precious stones and diamonds set in bronze or copper or stainless steel. For outrageous prices or at least what you think sterling silver would go for. I'm not sure what is going on. I'm an old lady. I've never seen this before.

MeelionDollerBogus's picture

All explained very well in a Southpark episode of Cash for Gold. This is to cause a constant recycling of useless crap for dollars to ensure anyone who might still have money & still be dumb enough to be fooled by scrap metal & shiny colored stones will soon be left with no money at all.

El Hosel's picture

..... Drivers, explained at the 1 minute mark


" Drivers, you understand?".... "Could be the Driver Brothers".    JPM,CME,CFTC,JPM,UBS there is a very large clan of "them Driver Brothers".

rosiescenario's picture

As a few have noted, ammo has far outpaced gold, silver, stocks, bonds, and even street drugs.


Now we need a place where we trade ammo futures. One would hope that the CME is working on this.

El Hosel's picture

 Maybe in last couple years ammo has outpaced gold/silver.... Silver $6 to $28 has kept up with a box of .357 just fine longer term....this after a huge pullback in silver.

espirit's picture

Still waiting on that ASE for a box of fresh .22LR.

Or, I've got some old monkey wards stuff I'll let go at 2 to 1.

No tax and free shipping!

Bansters-in-my- feces's picture

Well.I stopped reading at "One way to debunk the naked short seller conspiracy theory"

I am sure it was /is a fantastic fucked up article.

Fool me once shame on you,fool me twice......

Aint going to happen.

Dr. Bonzo's picture

Look guys... reality check here. Seriously. I'm a major believer in the PM story and its place in an asset portfolio. That said, let's get real.  I'm in Hong Kong. Big effin deal right. Wrong. Right across the border from us is Shenzen, basically the world's industrial center right now. Umpteen percent of global factory output for quite nearly everything on planet earth is manufactured right across the border from us. Sorry... no hard figures. Google it. What's the relevance of this to PMs? Because we, myself included, tend to ignore or even completely overlook silver's role as an industrial metal. When I started looking around for investment grade bullion a few years ago there were hardly any shops here. There are few now, but not that many. You can count em on one hand. There are however a whole bunch of industrial silver wholesalers / recyclers. They do _massive_ silver transactions. I mean _MASSIVE_. Back in '07 a retail investor couldn't just buy silver bullion off the street in Hong Kong, so I went to one of these industrial wholesalers to look at their product. I asked the guy if there were any shortages and what sort of quantities I could order on the spot. His terse reply was, no shortages... he could deliver kilos or tons within hours. Tons. I said, tons... like... how many tons? He said... how many you need? Five, ten, hundred? This is over-the-counter industial grade  for nigh every single consumer electronics item on the planet. The _perceived_ shortages are not in the ore, they are in the processing of the product. The retail coin / bar industry is still retooling to meet the _new_ demand for silver as an investment instrument, and _therein_ lie the problems with deliveries and delays. NOT the actual shortage of the physical product itself. Those issues are still years down the road. They're coming, we're just not there yet.

In sum, retail investor silver is a drop in the bucket compared to the volumes of silver that get bought-sold at those smelt shops. I'm not even sure _all_ the silver consumed by industrial producers is properly quantified. Because allegedly silver is hardly recycled, which is another stone-cold myth. There are recycling dumps across the border where _mountains_ of wasted consumer items are recycled for their core materials... zinc, copper... silver. By hand. It's a sight to see. But it's real, and apparently completely discounted by the talking heads.

Let's get back to reality. Industrial silver demand constitutes the bulk of silver demand, most of that demand comes from Chinese producers, and Chinese production is slumping. Chinese industrial output is at its lowest since 2007, mirroring the 2008 crisis, meaning... this has a huge impact on demand for industrial silver... meaning... this surpresses the silver price further. Other industrial metals, indeed, the whole Chinese manufacturing index confirms it. Demand is down. Way down. For every diehard ZHer and his pals ordering a pocketful of silver eagles, there's a car manufacturer or two or twenty _not_ ordering their 20 TONS of industrial silver smelt or recycled silver because demand is down. Savvy? And that's _physical_ demand. Now throw in the Goldman / HSBC paper hijinxes and what do you have?

The most frustrating thing hanging with the PM bugs is every day is supposed to be an UP day in the PMs market and every day it's not it's tin foil hat conspiracy theory ranting. It's getting a little stale.

Let's all get a grip. Our time will come. Use these opportunities to load up and just be patient.

Mr. Hudson's picture

The "naked short" theory was a hoax concocted by those who are sitting on tons of silver. People took the bait, and they are gonna get slapped.

Pseudo Anonym's picture

plausible but not credible

People took the bait, and they are gonna get slapped

those that took the bait will have to wait for a very long time to realize the true market value of the bullion they removed from the market, er.., away from banksters. they are gonna get slapped if they are forced to sell the bullion into a declining paper market.  they are the weak hands.  there is no doubt in my mind that the true value of bullion is in multiples of its current dollar price; however, that value cannot be discovered for as long as the banksters control the paper market for their own ends and means = making fiat look pretty and ageless.  weiner's basis/cobasis only reflects, i think, joe sixpack's confidence in the paper gold trading and the continued trust that banksters would honour their obligations and ability to deliver to retail.  it doesnt say anything about the condition of the shadow gold market.  at least i dont see it.

Lordflin's picture

And as a final note Bonzo... Your suggestion that no one accounts for recycled silver is a strawman argument... Yes, there is recycled silver... No, it is not a huge part of the market...

Lordflin's picture

Well Bonzo... Time for another reality check. The paper metals market is multiples of the physical... 15, 20 times as large... Perhaps bigger after we try on all the naked shorts this article implies do not exist... Years worth of precious metals production has move on the London Exchange, or the COMEX in minutes... So far as physical... Sprott Management made a large silver purchase awhile back... Took them months to complete it... guess they are not as well connected as you... Then we have the famous repatriation of German gold... Or the nasty things that have happened to the world's petty dictators who have undergone their own repatriation... Think Gadafi...Btw, his gold disappeared... Perhaps your friend has it...

To say that the majority of silver is used in industry is disingenuous. Something over 50 percent of PHYSICAL silver is used for industry (guess they haven't figured out how to make the paper stuff work yet)... But that is a small fraction of the paper market, where folks are still naive enough to think they have bought something of value.

You, and the writer of this article, are either fools or shills... and I don't personally care much which... And this is just another version of a story that has been floated for the past several years... That there is an abundance, or even a glut, in the physical market. The only glut is in paper... youncan witness its cliff-like selloff almost daily...

Pseudo Anonym's picture

personally, and that's just me, and it's for the sake of an argument,  i am having difficulty with the "naked short" theory as it is painted by butler.  what might be happening is two or three colluding banks creating, trading and extinguishing paper contracts back and forth, w/o the metal, creating fake market to sucker other parties into the market.  for as long as they can find metal to make physical deliveries at the margin, the paper fake market can go on at suppressed prices for a long time.  for as long as there is a stash some place, the banksters will find a plausible reason to prompt the usa to go in and liberate the gold so that deliveries at suppressed prices can be made.  it is a small price to pay for being able to print trillions in fake $ and fiat gold to control most of the globe.  there is no doubt in my mind that the characters that own central banks and the us gov't have their stash of gold secured and not willing to part with it - that's why "they" have to go and steal somebody else's gold.  i hear that iran has some gold put away....

akak's picture

I have a question to all those who categorically deny any possibility of manipulation in the silver market, or the purported official and surreptitious suppression of the price of silver over at least the past two decades that has been raised by so many analysts and commentators.

Everyone knows that price fixing (which is almost always to the downside) never works, as it inevitably leads to shortages as the artificially low price of the product leads to greater consumption than would have otherwise occurred. 

It is also well known that the formerly large world stockpiles of silver, well over ten billion ounces of silver just 50 or 60 years ago, are now for the most part gone, having been consumed by industrial applications. Those stockpiles were centuries in the making, but only a few decades (at most) in the dissipation --- and more pointedly and curiously, this happened even as the two former major uses of silver, in photographic film and in circulation coinage, were both in a steep decline even as those stockpiles continued to decline at the same time.

Given this fact, absent an artificially low price for silver while those stockpiles were being consumed, how does one logically account for, and explain, this demonstrated destruction of the formerly massive silver reserves?  Is it not in fact logical to assume that the price over the interim was NOT in fact a realistic market price, and for whatever reason was artificially low? 

Even sidestepping the idea of price manipulation and suppression, something simply appears wrong with this picture.


espirit's picture

I'm aghast! Whocouldanode.

Pseudo Anonym's picture

ok. thanks, i get it.  the chinese guy across the border is the authority on the state of how much silver is available.  hundreds of tons my friend, hundreds of tons of silver everywhere. got it.  it's one thing to be a salesman and another to actually drop tons of silver at your door step when you need it.  it would appear that some pm funds (sprott) are having trouble securing good delivery bars, if we are to believe his side.  so, i dont know. do i believe your unidentified chinese friend or sprott?  btw, i think sprott is talking his own book and it is in his best interest to propagate the  "shortage" story.

orangegeek's picture

As unpopular as this will sound, monthly Gold shows more downside ahead.




Gold priced in US Dollars should continue to fall.

jimmyjames's picture

As unpopular as this will sound, monthly Gold shows more downside ahead


You base your trade calls on a monthly macd?


Lordflin's picture

Of course... Technicals are essential in a completely manipulated market...

cornflakesdisease's picture

How do you put faith in technical analysis of a market where the numbers are not fixed?  I'm mean if you trade corn, only so much corn is harvested that year.  But in precious metals, so much is fake and on paper, that charts really can't help you.

What is the dollar worth if there is a never ending supply of them added each day.  The only conclusion I can gather is at the very least, less then what a dollar was worth yesterday.

cornflakesdisease's picture

How do you put faith in technical analysis of a market where the numbers are not fixed?  I'm mean if you trade corn, only so much corn is harvested that year.  But in precious metals, so much is fake and on paper, that charts really can't help you.

What is the dollar worth if there is a never ending supply of them added each day.  The only conclusion I can gather is at the very least, less then what a dollar was worth yesterday.

Pseudo Anonym's picture

for as long as physical deliveries at the margin can be made at suppressed prices, the tape can be painted and the basis/cobasis will not show it.  for as long as traders are gambling in the paper market, booking dollar profits, and not taking deliveries, especially the longs that keep selling instead of taking possession, this thing will go on for a long time in spite of the wishful thinking of gold bugs.

NotApplicable's picture

Lets not forget the actions of one Honorable Mr. Corzine, who stole from anyone trying to take delivery "on the cheap."

When one side can participate in a market, selling paper with impunity, then there is no real market.

I like how Weiner "debunks" naked shorts by discussing how naked longs have to roll contracts.

Being a student of Fekete myself, I've found his writings interesting, but he always seems to narrate outcomes that do not emerge from his stated facts, insisting he's already done it. While I understand the need to avoid infinite regression in an article, one could still do a bit better job of tying ideas together.

Anyone who studies this subject, yet believes that there is legitimate price discovery going on... well... I'll just say that's quite a perspective. Besides, there is no basis model that is functional, as the two markets have too many incompatible variables which make determining it. Tom Szabo, for instance, has a totally different model of the paper side than does Fekete, in an effort to minimize the inconsistencies. Thing is, he likely makes it worse, as he focuses on the ETFs.

Personally, I think that the premiums on coins are the real tell.

Pseudo Anonym's picture

the work of silverax, fekete, weiner et al. on the basis/cobasis metrics falls apart, in my view, because it assumes the market trades on its fundamentals, banks do not issue contracts for non-existent metal, the metal is there, and the market maker would not default and/or is not engaging in fraudulent activities.  i mean, if the basis/cobasis is a measure of confidence in the confidence game of paper pm markets, than, i guess, it is, predictively not much different than other models that bet on the direction of the next move.

jimmyjames's picture

 this thing will go on for a long time in spite of the wishful thinking of gold bugs.


Dollar up--Treasuries up--Gold up--Silver up

Oil down--Copper down--Stock markets down-

Maybe gold really can trade counter cyclical--sorta opposite to popular belief?



Stock Tips Investment's picture

I agree that the gold price could go down. Monthly indicators also what respldan. However, gold is very close to two very important support levels. Most likely, in the current circumstances, is that Gold prices rebound after approaching these support levels. If the price of Gold managed to "break" this support, so if we see a very steep fall.

espirit's picture

I also concur that the price of gold could go down until there is no phyzz left on the open market.

/sarc/nosarc/ - I forget which.

Acidtest Dummy's picture

What drives the price of Au and Ag? Physical demand (Asia & India) / fraud (paper games US Fed. & BOE.)

If there was one place for all the hot money to flow without damaging the real economy that place would be Au. If there was a second place that would be gold (fraudulent paper.)

The best way to increase western Au demand? Investigate mercury-silver amalgam dental prosthetics.

whatsinaname's picture

Most Indians would not sell their gold atleast in the old days. It is considered shameful to sell one's gold.

whatsinaname's picture

Most Indians would not sell their gold atleast in the old days. It is considered shameful to sell one's gold.