Supply and Demand 1 December

Monetary Metals's picture

Let’s consider speculation and arbitrage, and look at what it really means when the cobasis is deeply negative, in that light. This is the case in silver.

Per the definition of cobasis = Spot(bid) – Future(ask), it means either that physical metal is being dumped on the bid, pressing it down, or that people are aggressively buying futures, thus lifting the ask in that market.

The price of silver has been falling all year, with a sharp correction in the first three weeks of August. The cobasis has been low and/or falling most of that time (though it has come up a little in the past few weeks). We suspect that both market actions are occurring in silver right now. That is, at times silver metal is being dumped in quantity in the spot market, and at other times paper silver is being bought aggressively in the futures market.

Who might be selling physical silver? The data does not tell us, but looking around at the world economy, we can guess that smaller inventories may be needed at manufacturers of electronics. People may be bringing their metal to “cash4gold” companies to get dollar cash to pay their bills. For whatever reason, in the world of the physical stuff supply is coming to market. In contrast, the demand for the paper stuff—futures—is still strong at the moment.

Readers may have a different experience—we would love to hear about it—but we see continued optimism in comments on investor sites, Facebook groups, etc. Surely, “the bottom is in” and as the prices of the metals takes off once again, silver will rise faster than gold.

As we have written before, analysis of the open interest in COMEX futures is not so simple, but in the context of the present discussion it is interesting to take a look at the open interest for both monetary metals.

            The Open Interest of Gold and Silver

Open Interest in Gold and Silver


The graph supports our theory that leveraged speculators (which comprise a large percentage of the change in open interest) have gotten much more excited about silver since July. By contrast, the graph suggests that they are less exuberant about gold.

Thus we have a much higher cobasis in gold at this point. The question is: will demand for silver turn around first, or will leveraged speculators capitulate first?

We would not bet our money that it will be the former.

This week was punctuated by the major American holiday, Thanksgiving. Volumes were lighter than normal and liquidity less. We take with a grain of salt both the price moves and the basis moves. The prices ended up slightly on the week.

Here is the graph of the metals’ prices.

            The Prices of Gold and Silver



We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, hoarding or dishoarding.

One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production can be measured in months. The world just does not keep much inventory in wheat or oil.

With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

Here is a graph of the ratio of the gold price to the silver price. This shows how many ounces of silver one needs, to buy an ounce of gold. There was a small gain in the ratio this week. 

            The Ratio of the Gold Price to the Silver Price

Gold to Silver Ratio


For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide terse commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph. The February cobasis flirted with backwardation this week.

            The Gold Basis and Cobasis and the Dollar Price



The rising cobasis, now in backwardation, combined with a basically flat price of the dollar—just under 25mg—means that some selling of gold futures is balanced by buying of gold metal. There is nothing extreme in this graph, and as we noted above, volume and liquidity were not normal this week, especially the latter part of the week.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price



We see a sharp rise in the cobasis, though it’s impossible to tell if this is just the poor liquidity or if this is the start of a major move (the move is not pronounced in farther-out futures). This bears monitoring in the coming week.


© 2013 Monetary Metals

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Kina's picture

There is only one facet that needs to be considered when analysing the performance and future of gold and silver and that is the intentions of the Fed/CBs. Fundamentals are freaking nowhere in the equation and it is fantasy to try to except to look at the underlying demand in the metals which is large and how they might perform in the absence of market corruption.


You know, when somebody sells the global anual production of silver in 30 minutes in the off market....talking fundamentals and trends is pointless.



We know they would be at least at 1900 gold and 49 silver...where the corruption was kicked in again. I think that is where the anylysis should begin.

fijisailor's picture

Price supressoin appears to be limited to $10 dips in gold.  Looks like the bottom to me.

JerseyJoe's picture

Odd to try to read a market that is so manipulated.  It's fool's errand.   Just follow the manipulators - the Fed's proxies. 

Meanwhile, two Dutch banks defaulted on their gold delivery (what? in a Bear Market there should be tonnes of gold up for grabs so why default?) - And ABN AMRO is a clearing house for the LBMA!!!  If a member bank can't get gold... Hmmm.

And let's not forget the Germans are trying to get their gold back because they are fed up with the manipulation by the Fed.  The Fed told them 7 years!?!  Why?  Fractional leasing?  If gold is so hard to come by why is the price falling?   MANIPULATION. 

China is happily off in the wings buying massive amount 131 Tonnes in October alone...a new record.  They are feeding on folly  - the Fed's stupidity as their game collapses around them.  

The real turning point for gold and silver will be when Yellen increases QE to stave off the 10 Yr blowing through 3%.  The rest is just noise.



new game's picture

an gobble de goop

what i gather is nobody really fucking knows

from the following quote from above

though it’s impossible to tell if this is just the poor liquidity or if this is the start of a major move (the move is not pronounced in farther-out futures). This bears monitoring in the coming week.

what a joke-hey mon metals - go get a real job, like mining - real work! go push your paper thoughts up another ars..

JerseyJoe's picture

LOL Thank you!  Good one.  They need something to do to sound like they know what they are talking about...  What a waste of time!  And in the end "it's impossible to tell."  LOL  

Doña K's picture

@ disablevet

People who had seen this thing coming before zerohedge (5 years ago or so) and have been buying on cost average basis, they are most likely in the $850 to $950 average buy.

That's hardly ruins. Even those who jumped in above $1300 their insurance is still in place.   

disabledvet's picture

"worst year in 25 years for gold." silver is even worse. who is selling? the producers are. if copper breaks three bucks here "look out below." and no I would not be surprised if bitcoin peaked out at 100,000...although ten thousand seems more likely at this point. I did take note "Space X has been delayed." if that launch goes off without a hitch this week however "they're halfway to the moon" and not only will those battery fires be a thing of the past but "you've got a Solar City in your future" as well. again...if you've been short the market and long gold you've been ruined. "the Bank will now take possession of your mine(s)." don't even get me started on oil production.

Bindar Dundat's picture

Agree completely except for the ruined part.  If your not leveraged and have cash and some income producing properties you will be OK.