Quantum Change In Gold Demand Continues - Precious Metals Supply-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

Fundamental Developments

In this New Year's holiday-shortened week, the price of gold moved up again, another $16, and silver another 29 cents. Or we should rather say the dollar moved down 0.03 mg gold and 0.03 grams silver. It will make those who borrow to short the dollar happy...

Let's take a look at the only true picture of the supply and demand fundamentals for the metals. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.

Gold and silver prices in USD terms

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

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.

Here is the gold graph showing gold basis and gold price.

Gold basis, co-basis and the USD priced in milligrams of gold

Look at that quantum change after Christmas. The basis (i.e., the indicator of abundance) had peaked, and the co-basis (i.e. scarcity) had bottomed. Up until it reversed, those moves were tracking the price. As the price of gold was rising (the green line shows the inverse, the price of the dollar!), gold was initially becoming more abundant, less scarce.

But after Christmas, something snapped. Gold started to become less abundant as its price kept rising. This violates no economic law, though it has been a rare occurrence of late. Until Christmas week.

It should be no surprise that our Monetary Metals Gold Fundamental Price rose $29 this week, to $1,336.

Now let's look at silver.

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

The same pattern occurs here, though it is more muted. This is a bit unusual, as price and basis moves tend to be bigger in silver due to this metal's lesser liquidity.

The Monetary Metals Silver Fundamental Price rose 31 cents from last week, to $17.20.

© 2018 Monetary Metals

Addendum by PT:

These are quite interesting developments in light of what we have discussed in late December regarding the technical and sentiment backdrop as well as time cycles and seasonal trends in precious metals (see: Gold and Gold Stocks - Patterns, Cycles and Insider Activity, Part 1 and Part 2).

Readers may recall that we mentioned in passing that the most important macroeconomic drivers of the gold price were actually incongruously skewed to the negative side, seemingly contradicting the price action and the other evidence we presented. Occasionally, the gold market preempts future fundamental developments, though, and that may well be the case here.

We will shortly post an update looking at this situation more closely. In the meantime, here is another "technical" tidbit with respect to the current market structure. The following chart (which was recently published by EWI/Elliott Wave International) shows the positioning of the "managed money" category in silver futures according to the disaggregated Commitments of Traders report.

It is quite intriguing and clearly confirms what Keith indicates above - the recent buying pressure in gold and silver was apparently not a reflection of the actions of speculators in the "paper" markets.

The "managed money" net position in silver futures and options. The red and blue vertical lines show previous occasions when the positioning of this group became very one-sided. Needless to say, the herding instincts are strong among these market participants, as most of them simply employ trend-following strategies. They will tend to be correctly positioned during major trending moves, but near turning points their timing is absolutely terrible. Note also the instances of price/positioning divergences in 2015 and 2017 we have highlighted. Such divergences are frequently seen near turning points. [PT]

Charts by Monetary Metals, Elliott Wave International

Chart captions by PT