Precious Metals Supply and Demand

Chart Patterns

The prices of the metals dropped $20 and $0.39, a downhill slide interrupted on Thursday by speculation fueled by some economic data (as we covered in our special report), and which resumed on Friday.

A look at the price charts of both metal shows what could be head and shoulders patterns. The left shoulders are in June. The head is in September. And the right shoulder is occurring now. Or if you zoom out and look back to the start of 2017, you see a series of higher highs. In gold, at least. In silver, if you zoom to look at a graph starting in mid-2016, you see a series of lower highs.

Trying to divine the next price move based on past price action is trying to act based on incomplete information: the fundamentals. In stocks, we don’t know many people who look only at price charts, without regard to the company behind the stock. Why should it be any different in gold and silver?

Gold Daily

Gold over the past two years. The blue rectangle outlines the pattern discussed below. - Click to enlarge

It doesn’t really work well as a head and shoulders (H&S) pattern in gold, since the neckline would be beyond skewed. We should also mention that this pattern is really not what seems to be commonly believed nowadays. In its original meaning, an H&S pattern can only occur at the end of an extended trend, with the “head” marking a major price peak. The recent “head” would be below the peak seen last year, so it is disqualified based on this definition. Similarly, an inverse H&S pattern occurs only at a major low, not somewhere in the middle of a trend. Gold has moved sidewaysin a series of overlapping waves since rallying from late 2015 to mid-2016. In other words, this some sort of (complex) corrective formation is being built. Given that it has been two years since the price low (in non-dollar currencies the low was made 3 to 5 years ago), it seems highly unlikely that this is a corrective wave in a primary bear market. It is not impossible, but it isn’t likely. In USD terms gold trades 23% above its 2015 low – and it does so despite a fundamental macro backdrop that is at best neutral with a bearish tilt. All of this points to a beginning cyclical bull market.

Fundamental Developments

We will look at an updated picture of supply and demand. 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

Gold:Silver Ratio

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio rose a bit.

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.

Gold Basis and Co-basis and the Dollar Price

Here is the chart of the price of the dollar (inverse of the price of gold, in dollars) overlaid with basis and co-basis.

The dollar is up (i.e. price of gold is down). And the gold basis (i.e. abundance) is down, and co-basis (i.e. scarcity) is up.

Our calculated Monetary Metals gold fundamental price rose $17.

Gold Basis and Co-basis and the Dollar Price

Gold basis and co-basis and the USD priced in milligrams of gold - Click to enlarge

Silver Basis and Co-basis and the Dollar Price

Now let’s look at silver.

Unlike in gold, in silver the basis and co-basis did not move (in particular the continuous silver basis). However, the price did fall and greater than gold in proportion.

Our calculated Monetary Metals silver fundamental price fell $0.22, to $17.08.

What do you get if you combine this with the silver price chart showing lower highs? A price target for the bottom of the trend perhaps in the mid 15’s, and a gold-silver ratio well over 80.

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