This page has been archived and commenting is disabled.
The Exquisite Market Setup, 23 Aug
There is an exquisite setup building once again. Tight fundamentals in the gold market apply upwards pressure on the price. For quite a while, we have been saying gold’s fundamental price was around a hundred bucks above the market price. Well, the market price moved up $46 this week. What happened to the fundamental price? You’ll have to read on to see (no cheating and reading ahead!) but suffice to say it’s quite a bit higher than the market.
At the same time, the fundamental price of silver is below the market price. We included a graph last week, showing that gold is being sold at a discount and silver at a premium to their fundamental prices. The price of silver moved up this week, though it didn’t move like gold. It was up, then down, then up, then back down, ending a mere nine cents higher than last week. In fact, on Friday, the price of gold went up about 0.8% but the price of silver dropped 1.7%.
And this is the crux. According to popular belief, the prices of the metals are supposed to move together. Silver is supposed to go up when gold goes up, only more. This is due to money printing, inflation, economic fear, anticipation of further policy madness from the Fed, or whatever. It’s much clearer when you price everything in gold.
The fundamentals for silver just aren’t there right now. What happens when a trading thesis is believed by just about everyone?
These are the market upsets about which stories are told years later.
Could we see gold with a 13 handle and silver with a 14 handle? Read on…
First, 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, is 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 (stocks to flows) 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, and under the right conditions. 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.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio moved up sharply this week.
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 brief 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 price of the dollar dropped considerably, from 27.9mg to 26.8mg gold (i.e. the price of gold rose). However, the cobasis didn’t drop much and the basis (i.e. abundance) actually fell a bit.
The fundamental price moved up almost as much as the market price, and it’s still about a hundred bucks above the market.
There are two interesting points worth noting here. One, if this rising price of gold gets traders excited, there’s no reason why the market price couldn’t overshoot. Second, the rising price could motivate stackers to go out and buy before the price goes even higher. In other words, the fundamental could rise as well, in a positive feedback loops.
We make no prediction of $1,300+ gold. We are interested in valuing the metal, not timing the market. However, as market observers we see $1,300 as quite possible without much of a stretch.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
The price of silver went up. However, the cobasis (i.e. scarcity) is much lower than in gold—negative—and it fell.
We calculate a fundamental price of silver more than 50 cents below the market price.
Next week, we will talk about how we calculate fundamental prices and how they differ from the market price.
Monetary Metals will be in New York City on Friday afternoon, September 11. You are cordially invited to join us for a discussion of economics and markets, with a focus on how to approach saving, investing, and speculating. Midtown. RSVP here.
© 2015 Monetary Metals
- advertisements -


Most people greatly overestimate the potential flow if gold rises in price.
For most of us the idea of being able to spend a lot more money is enticing. I mean who has everything they want right?
But consider a huge jump in the POG. Much of the gold, in stock now, still would not move. Small fry might go out and buy but the savers who use gold as their wealth accumulation tool would see the validity of their strategy confirmed. They would likely only sell what they need to sell and continue to hoard the rest. Central banks won't sell their's most likely.
The volatility of the POG in recent years might make some people sell while the price is up anticipating a drop in price. But what if there were indications that the price would stay high? There would be no hurry to dishoard. Some might buy the car of their dreams or a better house but would they move out of their favorite wealth asset? Would they suddenly decide stocks is where they should try to save? I don't think so.
The idea that you can determine the future POG by dividing the amount of currency in circulation by the total stock of gold often fails to consider that it will be the flow of gold that determines the future price not the total stock of all the gold ever mined.
Anf the flow will be far less than most analysts predict.
At least that will be true for many of us who see the function of gold in the long term. We like it and won't blow it all just because the price goes far higher. How many Lamborghinis can a garage hold?
can't buy what they ain't got...simple economics
What?
I can't hear you....the stacking behind me is quite loud.
Monetary Metals will be in New York City on Friday afternoon, September 11..
Sucking bankster dick in Times Square, no doubt.
What an idiot. Silver was beaten because they are having trouble with buyers raiding the comex for the scraps. Over a million oz suddenly taken off late last week without any hint beforehand that they were coming for it. Boom, 242 notices served, 1.2 mil gone. The day before there were about 16 waiting on line for some.
Then we get treated to this inane article. 1 star.
@conax great point well made...if people thought the fractional reserve banking system was bad... they are in for some shock when they see the stink going on in the Comex
the hardest question I can't answer is how long can the manipulators play their game. One side of me says all the fundamentals point towards PM breaking out and heading north rapidly any day now. Then there is an event, you think this is it, gold is about to break; then it doesn't! So the other side of me says that the manipulators can continue indefinitely. (which greatly saddens me).
But ultimately they can't, even in the most twisted systems there is a ground zero, a breaking point beyond which there efforts will no longer work; history has taught us that time and time again. We just have to think longer. We will have full discovery. Personally I believe we are getting closer to that point but we are not there just yet; 2016 -2017 will be interesting....
www.teamramgold.com/about-us
Plenty of Fundamental silver? Then sell me a couple bags of junk silver at $2.00 over spot! Most big dealers are sold out or have raised premiums to the roof!
Once again, this fuckstick doesnt get it. There is no supply and demand fundamental. There is NO true market. Paper based manipulation of the physical market is the name of the game. Fraud is a means to an end. Just wait until REAL physical will be sought as insurance against the great collapse. True price discoverery is going to be a bitch for those with a hand full of paper contracts. They might come in handy in the coming toilet paper shortage.
Dear Monetary Metals -
When you can give me a plausible explanation why someone always seems to drop millions in gold contracts at illiquid times that garuntee that the worst possilbe price for their asset will be paid, then I'll listen to your full-of-crap analysis.
This guy works for Brown Brothers Harriman. Look them up.
In other words, he wont answer any of these valid questions on gold or silver honestly. Hes a liar and a fraud.
What a load of bollocks. If copper demand just plunged, and silver is a by product of copper mining then whatever the charts say, the supply of silver will plunge also.
and its price should go up. The fact that in April 2013, someone had to sell 400 tonnes of gold shorts in less than 4 hours to drive the price through long term support and even create this manipulated price range seems to mean nothing here, but in the real world it makes all the difference.
Just ask a central banker..