Murphy’s Law of Gold Analysis, Report 3 Jan

by Keith Weiner

Perhaps it may be lesser known than his other Laws, but Murphy wrote one for the basis analysis. It goes like this. If we observe that the fundamental price of a metal is far removed from the market price, the two won’t likely converge the next week. On the other hand, suppose we say this (as we did last week):

“The Monetary Metals fundamental price is measuring just that, the fundamentals. As with stocks or any other asset, our centrally banked, government-distorted markets can experience price volatility and even prices that deviate from the fundamentals for a long period of time. Just because we have been calculating a fundamental price for gold that is well over a hundred bucks above the market price, does not mean that the market price has to spike up $100 tomorrow morning. It might—and we certainly would not short gold when the market is in such a state. But as the market has proven since August, it might remain depressed for quite a while.”

Then something is bound to happen the next week.

No, the price of gold did not shoot up to approach our published fundamental. The gold-silver ratio promptly moved up +2.3%. As readers will recall, we have been calling for a ratio value over 80 for a while.

Read on for the only true look at the fundamentals of gold and silver…

But first, here’s 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 jumped up 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 cobasis (i.e. scarcity of gold) rose more than the dollar (which is the inverse of the price of gold). In other words, the gold price fell a few bucks but the metal became more scarce. By the way, the above graph had to be rescaled to make the higher cobasis fit. The move in the cobasis would appear larger on the scale used last week.

Not only is the Feb contract backwardated, but so is Apr. As long speculators are selling Feb to buy Apr, the latter backwardation is more notable.

The fundamental price jumped up this week, with most of the action on Wednesday.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

The price of the dollar in silver terms moved up considerably more than the price in gold terms. Conventional analysis would say that silver fell 52 cents, but we reject that view. The dollar is not the economic constant.

While the scarcity of silver rose a bit in response, it didn’t rise that much. The May silver contract is nowhere near backwardated.

Unfortunately for silver bugs, the fundamental price for silver fell 25 cents this week. This puts it above the market price, but not by a large margin.

It also means the fundamental price of the gold-silver ratio went up. We are almost embarrassed to say what it is now. Suffice to say, quite a lot higher than the market ratio of 76.7, as of Thursday…

© 2016 Monetary Metals

Comments

[Jack4952]

A starving man will pay ANTHING for some food. A man dying of thirst will so the same for some water. A man under threat of physical attack will pay anything for a rifle/pistol and ammunition.

My gold, exta supplies of food, water, cash (in several currencies), etc. along wiith my rifles, pistols and huge supply of ammunition are my INSURANCE. And I will NEVER give up my insurance!

All the rest is BULL**** !!!!

[Reichstag Fire Dept.]

I'm not selling my gold until it's Cdn$25,000.oo/ozT 

[ATM]

Why not hold until until there isn't a CDN?

[Jack4952]

Question for Reichstag Fire Dept:

WHY would you settle for such a low price, when there are predictions of it reaching $100,000 USD per troy ounce of PHYSICAL gold?

And, as some economists have said, if the U.S. dollar TOTALLY collapses, along with all the other paper currences and the "paper gold" contracts become worthless (since there are over 200 times the amount of "paper gold" contracts as there is PHYSICAL gold, some most holders of these paper gold contracts will NEVER receive their physical gold!), then the price of physical could reach infinity in terms of paper currencies!

Do NOT sell your physical gold under any circumstances UNLESS your life depends upon doing so.

[slimycorporated...]

Silver is worth whatever someone is willing to pay for it. All this day to day speculation is nonsense and I'm tired of reading about it.. up 10 cents down 5 cents, charts, graphs, trends, who cares. If you're stacking, does it really matter if you paid an extra $5 on your order? What is that, a coffee and a muffin? All of this analysis seems to be for paper traders, don't trade metals, just own them.

- slimy

[lunaticfringe]

I stopped accumulating for a variety of reasons. If I added anything at this point it would be platinum and palladium. 

I do expect to add to positions because I just don't think there is much more downside risk in a world flooded with fiat currency. At some point all of these stock addled brains are gonna try to get into cash with zero return and I don't think it will take much time to run the commodities up a flagpole.

I don't think you'll have to be forever patient either. Thinking two years based on over valued markets and a bear market already 5 years long.

The only thing the world has been hoarding is debt. Not subject to change anytime soon.

[JerseyJoe]

While the above ground hording of gold is published (whether it is believed is another story) - where, pray tell, is years of above ground silver stored?  SLV?  LBMA?  CRIMEX?   Really?   

And with base metal mining supplying about 50% of the mine output of silver and now in serious decline, and primary miners cutting back and high grading AND demand rising in the investment sector and India set to break all time import records - where is this big multi-year "horde" of silver coming from?   Scrap is also in serious decline because frankly - much has been sold already or sellers are holding back not wanting to be raped by the Cartel (BTW JPM appears to have taken delivery of 55M oz by some reports...Why?   Will this serve as a stop-gap horde to feed into CRIMEX's depleted reserves?  One would assume at higher prices if JPM is in the business of making money from their manipulations.  This horde hardly covers American Silver Eagle demand so 55M ozs won't go very far.  Or is JPM prepping?  )   

Some studies claim silver has been in deficit for decades - relying on old government hordes, scrap and old silver coinage to back-fill demand.   Those stockpiles are greatly depleted at this point...so where is this horde coming from?

You made the claim - please explain where this multi-year above ground silver horde is hidding.    Thx

[jaxville]

  We always hear of the "great melt" of the late seventies and early eighties.  People lined up to cash their flatware or old coins in.  What we never hear of are those who were buying silver back then.  I am not talking about contracts or options but actual bullion or bags of scrap coins. I remember the line up at a local Scotia bank that went out the doors and halfway down the block.  People were buying silver and gold in a big way back then.  Refineries were going up like dandelions in the spring to cash in on the public demand for silver.

 You would be amazed how much of that stuff is still out there in the hands of mostly elderly folks.  They are truly stale longs and looking for an exit with dignity.  The run up in price back in Spring of 2011 saw literally tonnes of old bars and coins go through my shop. It got to be so much that even refineries were refusing 1000 oz bars back then. That was my clue that the naked shorts had little to worry about with massive inventories at smelters they could obtain if needed for delivery. Fortunately I was able to reduce my silver inventory before the big drop in price.

  No numbers or guesses but I do know that a huge amount of silver is in private hands (in North America).  Eventually once the price rises this stuff will make it's way from private holders to the refiners and regular market. Folks who sat on it for some thirty years or more will hold on at these low prices unless forced to sell because they are going to a care facility and have no means to store the metal. 

  Another thing we saw back then was a huge amount of 100oz bars coming in for exchange on gold maples as those playing the ratio moved into gold as it was in the 30% range.

  My point is that public selling of silver lead to such an over supply at the refineries that the shorts could act without limit or fear knowing they could easily make delivery if called upon.  I suspect that when silver breaches forty or fifty dollars we will see the same thing as stale longs cash out or trade for gold.