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What Drives the Price of Gold and Silver?
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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that's all nice but the author works on the assumption that the gold market is not rigged. when i say riggeed, i mean that the banksters can issue gold fiat "at will" knowing full well that they can default on it if need be (corzined) w/o going to jail. just like the fed can create infinite dollars, the bb creates gold iou's. until hoarders start taking delivery and the banksters run out of countries they can invade to liberate their gold to satisfy market deliveries and deliveries to the shadow gold market where the players are allocating tens to hundreds of tons among themselves, the paper market is not the true reflection of what is going on behind the scenes. but those are my 2 cents. with so much fraud out in the open, i cannot explain why everybody would not buy pm and store it themselves; away from the banksters' grubby fingers.
By all means buy yourself some ammo but please understand that the best shot you can fire at a corrupt system is not with a gun or a terrorist action, but through the purchase of gold and silver. As the price rises and cannot be reversed the government may find itself having to eventually confront the reality of its useless tricks.
ammo primarily to defend against EBT card-carrying zombies when austerity sets in
You are absolutely correct...pms are at the heart of the economic war... Soon to be a shooting war, ISuspect.
THIS is exactly why I buy gold and silver.
"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"
A little scare tactic thrown in among knocks to PM's themselves so much ado about nothing. The authors myopic view shines through in the lack of basic mathmatics where the claim is made "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)."
IF, no Sir, not IF but WHEN as it is mathmatically impossible to continue as we do now. The Author should go visit Denninger http://market-ticker.denninger.net/ so he can explain it to him.
I couldn't make up my mind, so I did both: Cu:Zn and Au & Ag. Aggressively.. ;)
you are right, the death of the petrodollar will be a great blessing for freedom
The biggest problem remains the fact that the peasants of India and China are far more 'educated' than the city folk of Europe and America when it comes to investing in gold and silver. In the west I imagine that no more than 5% of investors hold any gold and silver while in the East the figure is at least a few multiples of that percentage.
At the present pace of gold diverstment in the west, it can only be a matter of time before we start trading with shells and beads.
In the meantime the speculators will no doubt account for some of the movement as they do with so many other things. It will be amusing however when they are caught holding useless government paper hoping for a paper profit.
In other words the speculators drive the market until they go over the edge themselves.
these peasants
they were educated the hard way - by being fucked by the british. they know now the banksters cannot be trusted
It looks like the West signed up big for the schooling. All in for the copybook headings.
Ah, the EBT'ers may be smarter than most think. They carry their gold in their teeth.
The EBT's are like the sheep caught with their head in the fence. There's no escaping natures law, physical laws, or the laws of the universe, we've been thru this before, humanity suffers from memory loss. In the bigger picture it's not really a problem, yeah they will return with death and destruction, but it will reset.
"When Money Dies" by Adam Fergusson is a must read for anyone intertested in how to invest in "bad" economic times (like now):
http://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586...
To quote the Amazon summary, "When Money Dies is the classic history of what happens when a nation’s currency depreciates beyond recovery."
Educate yourself. Make informed decisions.
good book, also available for free
Should be "required reading" for all citizens. That would scare the hell out of the folks in Washington DC...
What's a "citizen?"
Also known as a debt slave or a peon.
Where can I get it for free? Torrent?
http://www.goldonomic.com/When%20Money%20Dies.pdf
http://kat.ph/when-money-dies-the-nightmare-of-deficit-spending-devaluat...
Install a torrent client first, then click on Download Torrent on that page.
uTorrent is recommended: http://www.utorrent.com/downloads
No need to pay for the Plus version, the Stable version is good enough. Just click on Download Now.
Don't forget to use a VPN or like encryption.
LIBOR, stock market and real estate manipulation are admitted and proven but oh no PMs are subject to purely market forces. How convenient.
weiner would never admit there is a shadow gold market and rigging going on because that doesnt fit his little tidy basis model. as soon as weiner would be asked to account for the fraud in the market and the certainty of banksters that they can default on their obligation w/o any consequences, his little model would go sky high.
If weiner confronts the fraud in the market, that puts him 1 step closer to facing the fraud in himself. like an iceberg, the part you see is a small fraction of the total. I may be getting a little too jaded, but from his first article, I sensed the aura of slimey douche.
Exactly. This article is pure rubbish. Utter bullshit.
Best to watch the rapid increase of the price of ammo. It has outpreformed all metals over the last 5 years.
Besides its investment value it has utility!
even less popular loads like .22 mag are hard to find at any price. I recently switched to 10mm glock for concealed carry and cant even find that except for expensive "premium" loads.
Fear not A82EBA.Go to gunbot.com for instant avalability of various ammo.Also,as you can see by my name,im familar with the 10 Mike Mike.Got to PBR AMMO for the serious stuff at a good price.
thanks 10!
gunbot.net ?
May I recommend that you learn how to reload your ammo, especially the 10mm.
yup. it's easier to stack components right now than it is to stack factory ammo. not to mention cheaper. and more fun. plus you learn a useful skill. etc.
As long you don't blow your hand off by inserting too much gunpowder.
Im just glad gold's up $20 this morning
Why?
And not a moment too soon either.
Good to see that you've been moved to the late night slot here, as the act you've put together is true comedic 'gold' ...
Like a modern day Carnac the Magnificent, our author has gazed into the past\present\future and come up with a sure fire method of determining 'what drives the price of gold\silver' where all others have failed...
What drives the price of gold and silver are the machinations of men whose methods and motives remain as hidden to our Seer from the Mystic West as to any other mere mortal. But as any well-trained 'Objectivist' can tell you, 'there's a sucker born every minute' -and I guess the objective of this piece is to find them and invite them in to the CONTAGO SCHOOL OF CONTEMPORARY CAPITALIST COMMENTARY AND TAP DANCE ACADEMY...Buy a book of 10 lessons and save!
So..., do we still BTFD?
If the dollar goes Weimar/Zimbabwe, the "basis" on you gold won't matter. Only the number of ounces in your grubby little hands will be important.
If the dollar survives, then it would be a good idea to have some dollars.
When there is more than one outcome, only a fool puts all his eggs in one basket. An even bigger fool lets other people hold the baskets.
And a box of 9mm hollow-points should sell for about 10X its weight in gold.
Homeland Security just bought 1.6 billion hollow points for "range practice".......
My Asian buddy told me to ask joyful: "Ass him, WHY no likee goal an silbah, joypull??"