A Possible Sign of a Silver Turn
Keith Weiner

Precious Metals Firm Last Week

The price of the dollar was down 0.50mg gold, to 27.8mg, or if you prefer 0.04g silver to 2.18g. Why do we measure the volatile dollar in terms of gold and silver? There’s nothing else to measure it in, certainly not the dollar-derivatives called euro, pound, franc, yen, and yuan.

In the common tongue, gold was up $20 and silver rose 25 cents.

More importantly, we want to know what happened to the fundamentals. Read on for the only proper fundamental analysis of the gold and silver markets …

But first, here’s the graph of the metals’ prices.

Gold and silver prices.

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 is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio went sideways this week.

Gold-silver ratio.

For each metal, we will look at a graph of the basis and co-basis 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 co-basis in red.

Gold’s Fundamental Price Holds Up in Spite of Rally

Here is the gold graph.

Gold basis and co-basis and the dollar price.

The co-basis (i.e. scarcity) moved around and ended pretty close to where it started. What’s notable is that this occurred while the price of gold was rising. What you can’t see on this chart, is that in farther contract months the co-basis fell a bit more.

The fundamental price of gold didn’t move much this week. In other words, speculators pushed up the price but the fundamentals are holding.

Silver Fundamentals Improve

Now let’s look at silver.

Silver basis and co-basis and the dollar price.

In silver, you can see that as the price of the dollar fell (i.e. the price of silver rose) in the first part of the week, the co-basis went sideways to down. But in the last part of the week, the co-basis shot up while the price of silver fell a little.

It’s far too early to call a bottom in the silver price. However, the movement on Thursday and Friday is the sort of action we should expect to see more of if silver is to return to a bull market. It will take more action like this before we change our position on the white metal, but it is worth reporting on what we see when we see it.

Our calculated fundamental price of silver rose 35 cents, basically to the current market price.

We plan to drill down into the extraordinary move in the silver price around Thursday’s silver fix. Look for our article this week.

Charts by: Monetary Metals

Image caption by PT

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

www.acting-man.com