“…the supply and demand fundamentals of silver are stronger here than they have been since the Covid crisis.

… physical silver is scarcer than gold.”

This corresponds to the peak where we have drawn an arrow on the gold-silver ratio chart.

Soon after we said that, the ratio moved down about 5% (i.e. in favor of silver).

And now we see a similar pattern in the ratio of the gold basis to silver basis / gold cobasis to silver cobasis, as we saw on 23 August. The following chart shows the relative abundance / scarcity of the metals.

Gold-silver ratio

- Click to enlarge

Gold and Silver Price Fundamentals

As the ratio of the cobases falls (i.e. gold is becoming less scarce compared to silver), the likelihood of an outsized move in the silver price increases. Of course, the reason why silver is becoming scarcer is that its price is falling more.

Gold and Silver Price Fundamentals

- Click to enlarge

A Recipe for Rising Gold and Silver Prices

There is a pattern we see often in both metals. Price weakness tends to be driven by futures speculators liquidating positions. This means that the metal becomes scarcer. It stops going into the warehouse (i.e. carry trades, where market makers borrow dollars to buy metal and sell a futures contract against it, to pocket the basis spread). Instead, it can begin coming out if it gets scarce enough. In other words, the marginal source of demand had been the warehouse, but this becomes the marginal supply. A recipe for rising price, especially if buying outlasts the warehouse supply.

NB: we do not refer to the COMEX vault numbers, either “registered” or “eligible”. The amount of gold and silver out there is vastly greater than what is in a few depositories qualified by the futures market.

When decarrying cannot be sustained any more, then the price rises. The speculators—using leverage—can move the price a bit for a while, but soon enough the price is driven by the fundamentals.

This is observed in a distinct falling basis / rising cobasis as the price reaches a low point. The more that the price stretches the fabric of the market to the downside, the more probably that it will snap back.

Gold and Silver Prices

- Click to enlarge

Gold Price Fundamentals – Gold Basis Analysis

Here is the gold chart, showing the price of the dollar in gold (inverse to the price of gold, in dollars).

The gold cobasis (scarcity) has been remarkably stable since early February, around the -0.50% line. One of the things that makes the basis a good signal is that it is much more stable than price. Still, this is unusual in that there has been little change even while the dollar moved around from 16.3 to 18.4 milligrams (stated inversely, gold moved around from $1,685 to $1,905).

Perhaps it’s because there is little public excitement about gold. But whatever the reason, buying or selling has been evenly matched in futures and in spot gold. This is why the big price moves caused barely a ripple in the cobasis.

Gold Basis Analysis

- Click to enlarge

Silver Price Fundamentals – Silver Basis Analysis

Silver, on the other hand, isn’t moving in quite the same way as gold.

The price swings in silver are much bigger, so the little ripples in the gold cobasis are amplified into peaks and valleys in the silver cobasis (and the absolute magnitude is greater too, as silver’s lower liquidity means wider bid-ask spreads, and hence a higher basis and lower cobasis).

Silver Basis Analysis

- Click to enlarge