Summary:
We have consistently been making the contrarian call for a falling silver price and a rising gold to silver ratio for years. This ratio has risen a lot during this time. So are we ready to change our call yet? Review of Our Call in 2015 Let’s hold ourselves accountable for what we said last year in our Outlook 2015: “There is currently no evidence that scarcity is rising, and thus gold should shoot da moon.” Our bottom line recommendation was, “To those looking to trade, at the moment this report is published you might buy gold for a quick trade. There is no case to buy silver.” We added, “We see no rush to load up the truck just yet.” We said the likely driver for a higher price would be deteriorating credit conditions. How did we do with these calls? The gold price has not yet risen to meet our fundamental price. The price was basically down all year after a blip in January. Our silver call turned out to be conservative. Silver closed the year at .84, which was below even our number. Our call on the gold-silver ratio was in the right direction, though the market did not move a lot. It went up about 1.6%. How Not to Think about Gold There are several popular approaches to analyzing gold but the most popular is the conventional commodity analysis of annual supply and demand figures.
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Keith Weiner considers the following as important: Current Market News, Featured, Gold, Monetary Metals, newsletter
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We have consistently been making the contrarian call for a falling silver price and a rising gold to silver ratio for years. This ratio has risen a lot during this time. So are we ready to change our call yet? Review of Our Call in 2015 Let’s hold ourselves accountable for what we said last year in our Outlook 2015: “There is currently no evidence that scarcity is rising, and thus gold should shoot da moon.” Our bottom line recommendation was, “To those looking to trade, at the moment this report is published you might buy gold for a quick trade. There is no case to buy silver.” We added, “We see no rush to load up the truck just yet.” We said the likely driver for a higher price would be deteriorating credit conditions. How did we do with these calls? The gold price has not yet risen to meet our fundamental price. The price was basically down all year after a blip in January. Our silver call turned out to be conservative. Silver closed the year at .84, which was below even our number. Our call on the gold-silver ratio was in the right direction, though the market did not move a lot. It went up about 1.6%. How Not to Think about Gold There are several popular approaches to analyzing gold but the most popular is the conventional commodity analysis of annual supply and demand figures.
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Keith Weiner considers the following as important: Current Market News, Featured, Gold, Monetary Metals, newsletter
This could be interesting, too:
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We have consistently been making the contrarian call for a falling silver price and a rising gold to silver ratio for years. This ratio has risen a lot during this time. So are we ready to change our call yet?
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Review of Our Call in 2015
Let’s hold ourselves accountable for what we said last year in our Outlook 2015: “There is currently no evidence that scarcity is rising, and thus gold should shoot da moon.” Our bottom line recommendation was, “To those looking to trade, at the moment this report is published you might buy gold for a quick trade. There is no case to buy silver.” We added, “We see no rush to load up the truck just yet.” We said the likely driver for a higher price would be deteriorating credit conditions. How did we do with these calls? The gold price has not yet risen to meet our fundamental price. The price was basically down all year after a blip in January. Our silver call turned out to be conservative. Silver closed the year at $13.84, which was below even our number. Our call on the gold-silver ratio was in the right direction, though the market did not move a lot. It went up about 1.6%.How Not to Think about Gold
There are several popular approaches to analyzing gold but the most popular is the conventional commodity analysis of annual supply and demand figures. However, gold cannot be understood by looking at small changes in production or consumption. This is because virtually all of the gold ever mined in human history is still in human hands (to a somewhat lesser extent for silver). No other commodity comes even remotely close. The US Geological Survey estimated the total gold stocks at 171,300 metric tons at the end of 2011. Annual production is just 1.6% of these stocks. In other words, it would take 61 years at current production levels just to produce the same amount of gold as is now stockpiled. In regular commodities, this same ratio—stocks to flows—is measured in months. We just don’t hoard wheat and oil for the long term, for obvious reasons. Nor even iron or lumber or other durable materials. If total gold mining is 1.6% of gold inventories, then small changes to that 1.6% are not likely to have much impact on the gold price.How We Think About Gold
The implications of this are extraordinary. All of that stockpiled gold represents potential supply, under the right market conditions and at the right price. Yet there is never a glut in gold. Through thick and thin, through rising and falling prices, for thousands of years, the market goes on hoarding and absorbing whatever the miners put out. Conversely—unlike ordinary commodities—virtually everyone on the planet represents potential demand. Why? Because gold and silver are money. Compare gold to oil. The marginal utility of oil—the value one places on the next barrel compared to the previous—declines rapidly. For oil, it falls rapidly because once your tank is full, you have a storage problem—assuming you even use oil at all. However, the marginal utility of gold hardly declines at all. People are happy to get the 1,001st ounce, and accept it on the same terms as the 1,000th or the 1st ounce. We therefore think that changes in the desire to hoard or dishoard gold have a big impact on price and are more important than small changes in annual supply and demand flows.How We Analyze the Gold Market
As a result, we think of the market as the coming together of 5 different primary groups.- Buyers of metal, typically hoarders. Unlike buyers of other commodities, they don’t have to incorporate it into a product and sell it to make a profit. So there is no particular price that is necessarily too high, other than whatever their notion of a fair price is at any given moment.
- Sellers of metal who are dishoarding. They may think the price has hit a high enough level to attract their greed, or a low enough level to activate their fear.
- Buyers of paper (e.g. futures). These are speculators, with three key differences from buyers of metal. One, they use leverage. Two (for that reason and others) they have a short time horizon. Three, their exclusive goal is to make a trade for dollar gains.
- Short sellers of paper. Not nearly so big a group as popularly imagined, there are people who take the two lopsided risks of (1) shorting something with limited profit and unlimited loss potential and (2) fighting a 100-year trend. These people are nimble and aggressive and certainly play for the short term.
- Warehousemen, aka market makers. If few people are willing to bet on a rising dollar (i.e. falling gold price), then who sells gold futures? Enter, the warehouseman, who stands ready to carry gold for anyone who wants future delivery. If you buy a future, you are signaling that you want gold, not to be delivered now, but at some date in the future and this group will sell it to you by buying metal in the spot market and simultaneously selling a contract for future delivery. They don’t care at all about price, as they have no exposure to price. They respond to spread.