Advertise | Bookmark | Contact Us | E-Mail List |  | Update Page | UraniumSeek.com 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

What History Says for Gold Stocks in 2018-2019
By: Jordan Roy-Byrne CMT, MFTA

Jack Chan's Weekly Precious Metals Market Update
By: Jack Chan

Synchronized Global Growth May Have Arrived
By: Frank Holmes

Asian Metals Market Update: November-21-2017
By: Chintan Karnani, Insignia Consultants

Gold Seeker Closing Report: Gold and Silver Give Back Fridayís Gains
By: Chris Mullen, Gold Seeker Report

Operation Twist By Another Name and Method?
By: Gary Tanashian

SWOT Analysis: Gold Bounced Back After Attempts to Knock Down Price
By: Frank Holmes

Hyperinflation in Zimbabwe Ė Itís back, but maybe not for long
By: JP Koning

Gold Versus Bitcoin: The Pro-Gold Argument Takes Shape
By: John Rubino

Inflation and Counterfeit Credit
By: Keith Weiner

 
Search

GoldSeek Web

 
Paper Gold Is Rising


 -- Published: Monday, 2 May 2016 | Print  | Disqus 

By Keith Weiner

 

The price of gold shot up over $60 this week. The price of silver moved up proportionally, gaining over $0.85. The mood is now palpable. The feeling in the air is that of long suffering suddenly turned to optimism. Big gains, if not the collapse of the price-suppression cartel, are now inevitable.

 

The headlines and articles, screaming for gold to hit $10,000 to $50,000, are pervasive. Today we wonít dwell on our favorite point that if the price of gold hits $50,000 then that means the price of the dollar has collapsed. If you own an ounce of gold, then you may have a lot more dollars. But unfortunately, each of those dollars is worth a lot less.

 

Today, we want to look at this new alleged precious metals bull market. Does it have legs? Are we likely to see silver hit $20, much less $1,000? We will support our analysis with a new graph to show the big picture.

 

Letís look at the only true picture of supply and demand fundamentals. But first, hereís the graph of the metalsí prices.

 

          The Prices of Gold and Silver

 http://goldseek.com/news/2016/5-2kw/image002.jpg

 

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio was down slightly this week.

 

The Ratio of the Gold Price to the Silver Price

 http://goldseek.com/news/2016/5-2kw/image004.jpg

 

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

http://goldseek.com/news/2016/5-2kw/image006.jpg

 

We actually had to expand the range of both axes. The price of the dollar fell off the bottom, currently about 24mg. The cobasis (which is our measure of the scarcity of gold) also fell off the bottom, while the basis (which is our measure of abundance) rose above the top.

 

As the price of gold continues to rise, it becomes more abundant. Indeed, we can hardly say ďscarcityĒ any more with a cobasis below -1%.

 

Look, the supply and demand fundamentals could change at any time. However, as of this moment, the picture painted by the basis is not $10,000 or $50,000. Itís more like $1,235. More on this below.

 

First letís turn to silver.

 

The Silver Basis and Cobasis and the Dollar Price

http://goldseek.com/news/2016/5-2kw/image008.jpg

 

The first thing youíll notice is that the red cobasis line (i.e. scarcity) has not been falling to match the falling price of the dollar measured in silver (i.e. rising price of silver, measured in dollars) the way it has in the gold chart above. However, two factors mitigate this. One, the silver cobasis is much lower on an absolute basis (no pun intended). In gold, the cobasis is -1.1%, whereas for silver itís -1.4%.

 

Two, silver has a much stronger tendency to a falling basis and rising cobasis as each contract nears expiration. In times of greater scarcity, it causes temporary backwardationóeach contract tips into backwardation before it goes off the board. This phenomenon begins to distort the silver chart much farther out than in gold, and to a greater (numerical) degree. It has already taken hold in the July silver contract.

 

This segues into our next chart, a view new to this Report. We show the August and December gold contracts and the September and December silver contracts. Just the basis only, to make the chart easier to read.

 

The Gold and Silver Basis with LIBOR

http://goldseek.com/news/2016/5-1kw.png

 

You can see another aspect of our previous point. Even this far out, the silver contracts show more volatility than gold. And the two different months deviate from one another more than in gold.

 

Note the strong rising trend starting around mid-January.

 

So what is this showing, really? The basis is the real-world profit you would make to carry metal. Suppose you buy a bar of metal and simultaneously sell a futures contract, storing the metal in the meantime. You pocket the carry spread. If we quote it in terms of dollars, itís about 14 cents for December silver. We quote it as an annualized percentage, so that you can easily compare it to other investments (more on this in a moment).

 

The trend for the past few months is that carrying is more and more profitable. What does that tell us? It means that more and more firms will enter the carry trade. A profit attracts people, for some odd reason or another having to do with wanting to make money or somethingÖ

 

Anyways, we know that more market participants are carrying metal because itís more profitable than it was. Whatever number of people wanted to do it when the profit was 7 cents, we know that more will do it for 14.

 

What is this telling us about the state of the market for metal? If more and more metal is going into carry trades, then the marginal buyer of metal is this trader who carries metalówhom we often call the warehouseman. The marginal demand for metal is to be carried. This is a dangerous state, because when it flips around, then this marginal demand disappears and then the marginal supply of metal is coming out of carry trades. This is hardly the picture of a shortage driving a durable bull market.

 

We included two different LIBOR rates on the chart. Itís interesting to compare the basis to LIBOR. Now, in gold, carrying is about the same as 6-month LIBOR. In silver, the return is above that, and at one point got above 12-month LIBOR.

 

We have one final point. These traders are carrying metal to earn a small spread, with no price exposure. They are arbitragers. The activity of the arbitrageur always causes compression of the spread from which he is profiting. In this case, the carry trade involves buying metal in the spot market and selling it in the futures market. This tends to push up the price of spot metal and pull down the price of futures contracts.

 

So we have a growing group thatís pushing to compress the basis spreadóbasis is futures minus spot. Yet the basis is widening despite that. What could cause something to rise, when thereís a powerful and growing force trying to make it fall? What is the even-bigger force at work here?

 

It is the fast and furious buying of speculators, who bid up futures contracts on leverage. Paper gold is rising, and itís pulling up gold metal. Paper silver is rising, and itís pulling up silver metal.

 

For now.

 

 

© 2016 Monetary Metals


| Digg This Article
 -- Published: Monday, 2 May 2016 | E-Mail  | Print  | Source: GoldSeek.com

comments powered by Disqus



 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2017



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer

The views contained here may not represent the views of GoldSeek.com, its affiliates or advertisers. GoldSeek.com makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, is strictly prohibited. In no event shall GoldSeek.com or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.