Gold and Silver Get Powelled – Precious Metals Supply and Demand

Rumors Driving Short Term Price Swings

The prices of the metals dropped a bit more this week, -$7 and -$0.16. We all know the dollar is going down, that it is the stated policy of the Federal Reserve to make it go down. We all know that gold has been valued for thousands of years. So why do we measure the timeless metal in terms of paper currency?

On Friday, a curious thing happened. A report came out that Jerome Powell, who is on the Board of Governors of the Federal Reserve, is now the leading candidate to replace Janet Yellen as Chairman. This was deemed by the market to be good for gold and especially silver. Powell is not only an establishment guy, he has been part of the decision making body which has brought you the monetary policy which has caused/coincided with the drop in the price of gold from $1,558 when he took office.

Presumably the reason why he is a candidate, and the reason why the gold market bid up the price of gold, is that he will continue the current central plan. This plan could be charitably dubbed “monetary largesse”. Notwithstanding the theory held by both the mainstream Fed apologists and alternative Fed critics, this policy has not resulted in skyrocketing prices of either consumer goods or gold. But no matter, the likely appointment of the mainstream insider (as opposed to the other leading candidate, John Taylor, who is an academic and not a Fed official) is good news. For gold. For now.

Despite the fact that this same policy over the last 6 years has caused/coincided with falling and more recently sideways or weakly rising gold price action, Powell is deemed good for gold. Speaking of more recent weak rising price action, we know technical traders who see the small size of this move as proof of another down leg to come in the price.

In the short term, of course, the price will bang about due to such Kremlinology. In the long term, equally of course, the price will change due to the fundamentals. That is what this report is all about. We have invested in many years of research and development (and a license to a tick history database that contains every bid and offer with sub-millisecond resolution, going back to 1996). The output of our data science work are graphs showing the internal structure of the market, with unprecedented accuracy and clarity.

Photo credit: Jonathan Crosby - Click to enlarge

Jerome Powell, member of the governing board of the Fed. Powell is a member of the “we can be patient with tightening policy” faction, which presumably was the reason why rumors of his appointment were greeted with a positive reaction by the gold market. We would submit that it doesn’t really matter much which bureaucrat gets to head the central planning agency, at least in the long run. In the short to medium term we think the hawks rather than the doves have to be seen as the best friends of the gold market, which is inter alia exemplified by the fact that the gold price has been strengthening ever since the Fed has actually begun to hike rates after much hemming and hawing. How come? Aren’t rate hikes bearish for gold? First and foremost, they are bearish for free liquidity and money supply expansion, and as such they primarily endanger the Great Bubble. This is what we believe the buyers and exercisers of reservation demand who have driven gold prices up by more than 20% from their lows are focused on – they look beyond the short term to the denouement that will eventually be triggered by monetary tightening and what happens then. Since the mid 2000ds, the gold market has shown a tendency to anticipate such events far in advance, which has seen it occasionally rise despite a fairly gold-bearish macro backdrop.

Fundamental Developments

Below, we will discuss both the long-term big picture supply and demand fundamentals, and the intraday action around the Powell news. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.

Gold and Silver Prices

Gold and silver priced in USD - Click to enlarge

In this graph, we show both bid and offer prices for the gold-silver ratio. If you were to sell gold on the bid and buy silver at the ask, that is the lower bid price. Conversely, if you sold silver on the bid and bought gold at the offer, that is the higher offer price.

Gold:Silver Ratio

Gold-silver ratio, bid and offer - Click to enlarge

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.

Here is the gold graph showing gold basis and co-basis with the price of the dollar in gold terms.

Gold Basis and Co-basis and the Dollar Price

Gold basis and co-basis and the US dollar priced in milligrams of gold (note that the gap between market and fundamental price has continued to widen) - Click to enlarge

Our calculated Monetary Metals gold fundamental price fell $10 to $1,347.

Now let’s look at silver.

We also see a rising co-basis along with rising price of the dollar in silver terms (i.e., a falling price of silver in dollar terms). Much of this rise is the mechanics of the contract roll, as traders start to sell the contract before expiry and buy the next month.

Our calculated Monetary Metals silver fundamental price fell $0.05 to $17.03.

Silver Basis and Co-basis and the Dollar Price

Silver basis and co-basis and the USD priced in grams of silver - Click to enlarge