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Supply and Demand Report 16 Feb

Monetary Metals's picture




 

The dollar dropped a lot more this week than it has in any one week for a long time. Measured conventionally, the gold price spiked $51, and the silver price by $1.47. Gold owners have 4% more dollars, and silver owners have 7.4% more dollars. However, those dollars are worth less. How much less?

To calculate the value of the dollar (or anything else), we can’t use consumer prices. This is because consumer prices are constantly falling, in real terms. Consumer prices are falling because industry is constantly pushing itself to be more efficient. Gold is the closest thing to a constant value in the economic universe, the equivalent of the speed of light in a vacuum, C.

The dollar went from 24.55mg gold to 23.59mg, a loss of 3.9%. If you have 4% more of something worth 3.9% less, you are exactly even (trust me on the math, if you don’t remember those cases of percent from 9th algebra class). Or another way of thinking of it is that your wealth went from one ounce to one ounce of gold, a change of 0%. The profit is illusory, an artifact of measuring money (i.e. gold) in terms of falling credit (i.e. dollars).

Unfortunately, if you sell your gold to take your phantom profits, you are subject to taxes, at least in the US. The IRS believes that your gain is real. They will take perhaps a third of it, and the state tax authority will take more. Unless you used leverage, if you traded this spike then you have taken a loss when you account for taxes. Bummer.

Silver is a different picture. The silver price went up 7.4% in dollar terms, or 3.2% in gold terms. A week ago Friday, it took 63.4oz of silver to buy an ounce of gold. Now it takes only 61.5oz. We won’t do the arithmetic here, but silver speculators likely did make a small profit, even after they net out taxes. Congratulations.

Now be aware that while the price of silver may have shot up, the supply and demand picture hasn’t changed much. Leveraged speculators went on tilt this week. Could they go get crazier next week? Absolutely. This is why we always say never naked-short a monetary metal!

We can only emphasize that unless the fundamentals in silver change in a big way, the silver price is likely headed for a big fall. We estimate that the neutral price for silver has risen only slightly, to around $18.60. When the exuberance and leverage (or access to credit) dries up, the price could fall back even faster than it rose. It could overcorrect, too. If speculators push it as far below the neutral line as they have pulled it above, that would put it at $15.75.

It’s something to think about, while picking up those silver pennies in front of the steamroller.

Anyways, 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 gold price measured in silver, otherwise known as the gold to silver ratio.

The Ratio of the Gold Price to the Silver Price

 

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 Gold Basis and Cobasis and the Dollar Price

 

The April contract had been in a slight backwardation. Not any more. As the dollar has dropped, the cobasis has dropped a bit. Now it’s -0.11%.

We’re still bullish on gold, and our estimate of the neutral price has risen $30, to over $1420. This does not mean the price must rise next week (though it seems likely, based on the technicals).

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

 

Look at that drop in the cobasis! It is worth noting that we are now but a few weeks away from First Notice Day, and we are in the thick of the contract roll right now. Most who had the March silver contract must sell, as they don’t have the cash to take delivery. If they wish to remain long silver, they can buy May or some other month. This relentless selling of the March contract places downward pressure on its bid. Look at the math.

  Basis = Future(bid) – Spot(ask)

  Cobasis = Spot(bid) – Future(ask)

Heavy and protracted selling of the contract headed towards expiry should cause a falling basis. The market makers will bring down the ask, to keep a consistent spread. The net result is a basis that falls off the bottom of the chart and a rising cobasis. This is precisely the pattern of temporary backwardation that we have been documenting in the new normal, post-2008.

Despite this selling pressure on the March contract, the basis is rising and cobasis is falling. How much would speculators have to buy to cause this, so close to contract expiry? A lot. The same pattern is occurring for the May, and July contracts.

 

© 2014 Monetary Metals

 

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Mon, 02/17/2014 - 14:51 | 4445289 Seeking Aphids
Seeking Aphids's picture

"supply and demand of silver hasn't changed much". Really? How do you know this? Or is this just an unsubstantiated claim to fit your theory? I do know that silver demand has shot up in India given government's intervention in the gold market there. So I am not at all convinced that demand for silver hasn't changed. If you are going to make such claims please back them up...otherwise it looks like you are just blowing smoke......

Mon, 02/17/2014 - 14:43 | 4445274 constantine
constantine's picture

I guess the point that this guy is trying to make is that increases in productivity are the opportunity cost of owning gold, which I agree with.  However, he seems to suggest that the world somehow the world became so much more productive on Friday that all of gold's nominal gains were negated... what a bunch of nonsense.  

Go somewhere else to try to baffle us people with your bullshit.

Mon, 02/17/2014 - 12:35 | 4444973 logicalman
logicalman's picture

I wonder what the price of metals would be if all the paper promises didn't exist.......

Mon, 02/17/2014 - 11:39 | 4444859 John Paul George
John Paul George's picture

It is important with any of these articles to understand who is presenting the information and what possible motivation they might have to spin the information in a particular direction.....Everyone has an agenda!!

Mon, 02/17/2014 - 17:07 | 4445644 Bindar Dundat
Bindar Dundat's picture

JPG

 

I have no agenda. I just like the feel of gold and silver in my hands.  

 

Everything else is just so 2008.....

Mon, 02/17/2014 - 11:14 | 4444811 Bastiat
Bastiat's picture

The IRS doesn't take "perhaps a third of it" -- they take 28% as they classify gold and silver as "collectibles" despite Ron Paul's efforts over the years.

Mon, 02/17/2014 - 15:25 | 4445375 TheGoldMyth
TheGoldMyth's picture

Bastiat: Thanks. what you mention, and the fact that banks do not pay tax or interest on loans from tax payers speaks volumes.

Mon, 02/17/2014 - 09:20 | 4444647 LawsofPhysics
LawsofPhysics's picture

Now this paper-pushing shill wants to talk about value, worth, and purchasing power?  LMFAO!

An ounce is an ounce and a gram is a gram dumbass.  I don't think you understand why many of us store some of our wealth in PM's.

Mon, 02/17/2014 - 09:54 | 4444658 TheGoldMyth
TheGoldMyth's picture

Ok, so a global parasite comes along and decides to buy al the gold/pm'S to maintain an artificial scarcity. Your wealth would be better served by removing the parasite rather than performing a feeding frenzy with it only to encourage it further.

Personally, i invest in looking after what is left of the environment. Now 'there/here' is something that is both the store/preserver, and the source of all wealth, ..that is..before it is destroyed by various banking system concocted feeding frenzies.

Mon, 02/17/2014 - 11:10 | 4444804 epicurious
epicurious's picture

Just curious Mrs. or Mr. Myth what is a global parasite?  Is that like a troll who has been on the site for two+ weeks?  There is a lot of evidence that big money sitting on the supposed sidelines is now moving into physical.  This is not necessarily going to have any impact on the equities or dollar.  Morgan/Chase is now on the long side of the trade for the first time since they took over Bear Stearns positions.  Pay attention before you speak.

Mon, 02/17/2014 - 15:20 | 4445358 TheGoldMyth
TheGoldMyth's picture

I have been on this site as an unregistered user for 7+ years. Nice!!
As you already know, the global parasite is the banking system.

It (The banking system) currently is constrained to buy gold in a depressed gold market to maintain scarcity (Like banks do in a depressed housing market, they lock the house for better times.). This helps banks to maintain the value of their own inventory which is quite obese with gold (Satiety equalls brusting.), a luxury metal with psychological worth when it value is measured beyond the industrial processes products that require it.

Naturally, the parasite wants gold to be recognissed and extreme cost measured in toxic detruction during the extraction process is not something you have had time to consider. People simply prefer to talk about the weather instead

Study in more depth, and go beyond name dropping those gold buyers of last resort you mention that help maintian artificial scarcity. Particulalry study in more depth when REAL wealth is tied directly to the environment that is being destroyed increasingly/exponentially at this time.

So what we have here this paraiste that will stop at nothing to aquire more gold until there is nothing left of value to trade it for except for more gold. Somehow, this makes sense to the parasite.

Thanks epicurious !!

Mon, 02/17/2014 - 15:25 | 4445377 akak
akak's picture

 

I have been on this site as an unregistered user for 7+ years.

That is fascinating, as ZeroHedge has only existed for the last five years.

Tue, 02/18/2014 - 19:33 | 4450240 MeelionDollerBogus
MeelionDollerBogus's picture

It's all very complex & timey-wimey.

Mon, 02/17/2014 - 15:45 | 4445425 TheGoldMyth
TheGoldMyth's picture

I can teach you how to do it too. Actually it is not that impressive when you know how.

Mon, 02/17/2014 - 15:43 | 4445408 TheGoldMyth
TheGoldMyth's picture

Ok, i was waiting for 2 of those years.
Thanks for the historical perspective akak !! "Fascinating" indeed. I guess i learned fast how to leverage assets, 'time' in this case.

Mon, 02/17/2014 - 08:58 | 4444618 Silveramada
Silveramada's picture

1350 & 22.50 next stop for the PM train...cho-cho..

http://zysites.com/silververitas/

Mon, 02/17/2014 - 08:44 | 4444605 LaoTzu60606
LaoTzu60606's picture

the smoke bomb newsletter writers live, 

this article says nothing

nice

lt

Mon, 02/17/2014 - 09:41 | 4444676 TheGoldMyth
TheGoldMyth's picture

LaoTzu60606 the article probably says what you do not want to hear, and that is....IMO....that the central banks have become the major gold buyers of last resort. This means that they have taken gold out of circulation and have thus created an artificial scarcity which actually helps the gold price to stay up.

The question you should ask is what if the debt ridden market no longer has paper for luxury items like gold (Not counting industrial uses like coating the terminals on batteries in phones for example.).

You need to a new vision of what is happening in the gold and PM's market. Gold bug speak is like a broken record, which obfuscates this new histor of gold/pm's.

Thanks!

Tue, 02/18/2014 - 19:36 | 4450250 MeelionDollerBogus
MeelionDollerBogus's picture

No, scarcity of gold happens regardless of the owners: the value of gold in a new paradigm is greatly augmented by the backing of central banks with the removal of previous fiat they used to issue.
This is a step, long expected, in the end-game.
For those of us who read Currency Wars this is no surprise.

Mon, 02/17/2014 - 14:47 | 4445284 Seeking Aphids
Seeking Aphids's picture

TGM what proof do you have  that CB's have become the buyers of last resort? What about the frenzied buying in China over the last year or so? That is being done by people who want to protect themselves from the devaluation of their currency by the CB's. The Japanese and Americans should be doing the same thing, imho. Gold is not a luxury item - it is a way to store value in the face of inflation and currency devaluation - two very real threats to most people on this planet. As for protecting the environment - fine and agreed but we all have bills to pay and need to eat/feed our kids, etc. If you can survive by simply saving the planet good for you...the rest of us need to make it in the current economy and that means being smart and trying our best to protect our meagre savings..........

Mon, 02/17/2014 - 14:19 | 4445205 Agstacker
Agstacker's picture

Gold is money, everything else is credit, like those green pieces of paper in your wallet that say 'Federal Reserve Note', as in promissory note.  Slave on, dude.

Mon, 02/17/2014 - 10:04 | 4444704 philipat
philipat's picture

"Consumer prices are constantly falling"

Really? I hadn't noticed that, especially for essentials such as food and energy. Healthcare and Education costs are also not exactly benign. But, yes, I realise that the Official CPI is entirely under "Control".

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