Seeking Alpha

Precious Metals Supply And Demand Report

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Includes: AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, OUNZ, PHYS, PSLV, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, UBG, UGL, UGLD, USLV, USV, ZSL
by: Keith Weiner
Keith Weiner
Hedge fund manager, long-term horizon, gold, gold & precious metals

Fat-Boy Waves

The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77. A look at the chart of either metal shows that a downtrend in prices (i.e., uptrend in the dollar) that began in mid-April reversed in mid-July. Then, the prices began rising (i.e., the dollar began falling). But that move ended on September 8.

Stars of the most popular global market sitcoms, widely suspected of being "gold wave-makers". From left to right: Auntie Janet "Transitory" Yellen, Mario "Smaug" Draghi, and last but not least, the healthiest leader in history, Jong-un "Fat-Boy" Kim, as always positively radiating good vibes. [PT].

One way to think of these moves is as the addition of energy into the market. Like tossing a pebble into a still pond (not quantity of water, but energy that perturbs it). Once the speculators get the idea that gold and especially silver should go up, well, it becomes self-fulfilling. Statements by the Fed, the ECB, or even the fat boy who rules North Korea can all have an effect.

Buying begets buying, as the chart shows signs of a breakout. But then, especially in this moribund market, the energy of new speculation is depleted. And the price subsides until new energy is added by the next event. We are in that mode right now.

Fundamental Developments

We will look at an updated picture of the fundamentals of supply and demand of both metals. But first, here are the charts of the prices of gold and silver and the gold-silver ratio.

Gold and silver, priced in USD

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

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, bid and offer

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.

Below is the intraday gold graph showing Friday's action, i.e., the gold price and the gold basis intraday (here you can see the regular 3-month gold basis chart).

The gold price in USD (golden line) and the gold basis (blue line)

This is interesting. From a bit after 6 am (GMT), the price of gold is rising but the basis is falling. That means the buying was fundamental, i.e., gold metal was bought. This lasted until a bit after 7 am. At around 10:30 am, something different occurred. Speculators started buying futures. They drove the price up from $1,288 to $1,290, but this took the basis up from 0.8% to 0.83%.

After that, the basis tracked the price. That is, when price was falling the basis was falling (i.e., futures were being sold) and when price was rising the basis rose with it (i.e., futures were bought). By the way, don't pay too much attention to the end of the day, as particularly on a Friday, liquidity tends to dry up and the signal can be spurious.

Our calculated Monetary Metals gold fundamental price fell $30 to $1,348.

Now let's look at the action in silver intraday on Friday (here is the regular daily silver basis chart).

Silver priced in USD (gray line) and the silver basis (blue line)

Interestingly again, we see the same fundamental buying of silver after 6am from $16.80 to $16.86 while the basis drops from 0.5% to 0.47%. After that, like in gold, the price action was driven by speculators in the futures markets.

Our calculated Monetary Metals silver fundamental price fell $0.25 to $17.05.

© 2017 Monetary Metals

Charts by StockCharts.com, Monetary Metals

Chart and image captions by PT