Black Holes for Capital – Precious Metals Supply and Demand

Race to the Bottom

Last week the price of gold fell $17, and that of silver $0.30. Why? We can tell you about the fundamentals. We can show charts of the basis. But we can’t get into the heads of the sellers.

We can say that in the mainstream view, the dollar is rising. The dollar, in their view, is not measured in gold but in rupees in yuan and rubles. You know, all the superior forms of money…

OK, all joking aside, the reality is that most currencies are falling. Which means the people in most countries are getting poorer, the capital is getting sucked out. Perhaps those who have gold, to hedge against the risk of a rainy day, now feel the water falling onto their faces?

Whatever it is, in just over two months the price of gold has dropped $100. And the fundamentals of gold have softened right along with the price.

Yuan and Ruble

Other people’s fiat: in the global race to the bottom, it was recently the turn of emerging market currencies to tank. [PT] - Click to enlarge

Fundamental Developments

So whither the price of gold next? We will provide a picture of the changing gold and silver fundamentals.

But first, here is the chart of the prices of gold and silver.

Gold and Silver Prices

Gold and silver priced in USD, as of the end of last week - 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 (see here for an explanation of bid and offer prices for the ratio). It went up a bit last week.

Gold: Silver Ratio

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

Gold Basis and Co-basis and Dollar Price

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

Yeah, gold looks like it became a bit scarcer, with a rise of about 10 bps in the August co-basis. But the August contract is starting to come under pressure due to the roll. Farther contracts show a small rise in abundance. This drop in price is induced by the selling of physical metal.

Unsurprisingly, the Monetary Metals Gold Fundamental Price fell another $26 this week to $1,298. What else would you expect it to do if the price drops and the metal becomes more abundant?

Gold Basis and Co-basis and Dollar Price

Gold basis, 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.

The price drop in silver may have been a bit larger, but the move of the basis both near and farther out show a rise in scarcity of this metal. The Monetary Metals Silver Fundamental Price rose 41 cents, just about where it was a week prior at $17.46.

This should be interesting to watch. Typically, the prices of both metals move together, with silver moving farther to both extremes. But if the gold fundamental price keeps dropping and the silver fundamental price rises, well, there are exceptions to every rule.

Silver Basis and Co-basis and the Dollar Price

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