Gold-Silver Ratio Message - Precious Metals Supply And Demand

|
Includes: AAAU, AGQ, BAR, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDM, GLDW, GLL, GTU, GYEN, IAU, IAUF, OUNZ, PHYS, PSLV, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, UBG, UGL, UGLD, USLV, USV, ZSL
by: Keith Weiner

Fundamental Developments

Last week, the price of gold fell three bucks and that of silver fell a quarter of a buck. But let us take a look at the supply and demand fundamentals of both metals. Also, we have an interesting development in the gold-silver ratio, a topic we have not addressed in a while.

First, here is the chart of the prices of gold and silver.

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 (see here for an explanation of bid and offer prices for the ratio). It rose further this week.

Gold-silver ratio

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

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

The October contract shows an increase in scarcity (i.e., the co-basis) of gold, though it should be noted that the December co-basis increased less, and the gold co-basis continuous did not increase.

This week, the Monetary Metals Gold Fundamental Price rose another $10, from $1,366 to $1,376.

Now let's look at silver.

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

The December silver co-basis looks like the October gold co-basis (50 bps lower in absolute magnitude than October gold, but higher than December gold), indicating rising scarcity. And the same occurs in the silver cobasis continuous.

The Monetary Metals Silver Fundamental Price rose 30 cents, from $15.78 to $16.08. This is the same level it held on August 13. So, we are potentially seeing a fundamental price bottom, after a falling trend that began May 21 and lasted almost three months.

A Close Look at Gold-Silver Basis Ratio Signals

Now let's turn to the gold-silver ratio. Here is a picture of the gold-silver basis ratios. It is the ratio of the gold basis to the silver basis and the gold co-basis to the silver co-basis.

Gold-silver basis and co-basis ratios

Being ratios, they are telling us about the relationship between the gold fundamentals and the silver fundamentals. If the gold basis is rising relative to the silver basis, it means the abundance of gold is rising faster.

If the gold co-basis is falling relative to the silver co-basis, it means the scarcity of gold is falling faster. Or the abundance of silver is falling faster and scarcity of silver is rising faster.

This chart is suggesting that now may be a good time to trade one's gold for silver. However, before you place that order, let's zoom out and look at the three-year chart (also on our website).

Gold-silver basis ratios, long term

This is the best time to trade gold for silver in the last three months, alright. But if the basis ratio gets over 1.05, then it will be the best time in the last three years (this ratio hasn't spent more than two weeks or so above 1.05 since 2009).

By the way, the last two peaks were both in 2017: July 10 and December 4. At the July peak, the gold-silver ratio hit a peak over 79. It subsequently fell to 74.2 (-6.1%) about two months later. At the December peak, the ratio was 78.4, and it fell to 76.6 (-2.3%) a month later.

This time, the gold-silver ratio is higher, currently at 82.7 as of Friday's close. We will keep you posted as this setup either grows or fizzles.

Charts by Monetary Metals