Silver Takes the Elevator Down – Precious Metals Supply and Demand

Election Effect Debate

Last week, we talked about the effect of the French election on the gold and silver markets, and noted:

Of course, traders want to know how this will affect gold and silver. As we write this, we see that silver went down 30 cents before rallying back up to where it closed on Friday. Gold went down about $20, and then half way back up.

At this point, we are not sure if the metals are supposed to go up because more printing. Or go down because the euro constrains France from printing. Or silver at least should go up because the economy is going to be better with France remaining in the Eurozone. Or go down because the ongoing malaise will only progress as it has been. Or some other logic… and the price gyrations this evening show that traders don’t agree either.

Silver Price in Terms of Real Money

It didn’t take too long. Here is what happened to silver this week. The graph below shows the price of silver in real money (i.e. gold).

Silver has been falling for going on one year, but clearly since March 1. After one last hurrah at the end of March, it has been taking the elevator down. And by its fundamentals it should be quite a bit lower — 0.0125.

Silver Price in Terms of Real Money

The price of silver in terms of real money - Click to enlarge

Fundamental Developments

In any case, we are interested in watching what the fundamentals of the metals are doing. We will take a look at the graphs below, but first, the price and ratio charts.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It had another major move up this week, after a major move up last week.

Last week, we said:

If prior peaks are an indication, there may be a spot of resistance at 72.5 (+0.8 above Friday’s close) and another at 73.25. If the ratio should go over these levels, then it may go all the way to its fundamental level (discussed below).

Gold and Silver Price

Prices of gold and silver - Click to enlarge

Gold:Silver Ratio

Well, it broke those levels and ended the week just under 74.

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:Silver Ratio

Gold-silver ratio - Click to enlarge

Gold Basis and Co-basis and the Dollar price

Here is the gold graph.

The scarcity (i.e. the co-basis, the red line) was on the rise this week. It makes sense, that as the price of gold drops (which is the mirror of what this graph shows, the price of the dollar in gold milligrams) the metal becomes scarcer. This means speculators are selling their paper. If owners of metal were selling, then the metal would not become scarcer and might even become more abundant.

However, it only became a little scarcer while the price dropped almost twenty bucks. So our calculated fundamental price fell $15 to $1,274, a few bucks above the market price.

Gold Basis and Co-basis and the Dollar price

Gold basis and co-basis and the dollar price - Click to enlarge

Silver Basis and Co-basis and the Dollar Price

Now let’s look at silver.

In silver, the price fell a lot. 72 cents. The co-basis rose (i.e., abundance dropped and scarcity increased).

Last week, we asked:

Some speculators definitely got flushed. However, the question is how many and how much?

Clearly it happened to more of them this week. And, unless the fundamentals get stronger, it is likely to flush even more leveraged futures positions. Our calculated fundamental price fell three cents this week, now a buck thirty under the market price.

Silver Basis and Co-basis and the Dollar Price

Silver basis and co-basis and the dollar price - Click to enlarge