Yield Curve Compression - Precious Metals Supply And Demand

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Includes: AAAU, AGQ, BAR, BIL, CLTL, DBS, DFVL, DFVS, DGL, DGLD, DGP, DGZ, DLBL, DLBS, DSLV, DTUL, DTUS, DTYL, DTYS, DULL, DZZ, EDV, EGF, FIBR, FLAT, FTT, GBIL, GEUR, GHE, GHS, GLD, GLDI, GLDM, GLDW, GLL, GOVT, GSY, GTU, GYEN, HYDD, IAU, IAUF, IEF, IEI, ITE, OPER, OUNZ, PHYS, PLW, PSLV, PST, QGLDX, RINF, RISE, SCHO, SCHR, SGOL, SHNY, SHV, SHY, SIVR, SLV, SLVO, SPTL, SPTS, STPP, TAPR, TBF, TBT, TBX, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBG, UBT, UDN, UGL, UGLD, USDU, USLV, UST, USTB, USV, UUP, VGIT, VGLT, VGSH, VUSTX, ZROZ, ZSL
by: Keith Weiner

Hammering the Spread

The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.

The Federal Reserve - carefully inching forward to Bustville

People believe that the Fed must fight inflation, hiking rates to prevent overheating. Maybe. What the Fed is, in fact, doing is pushing the yield curve towards inversion. It's not there yet, but right now, the 3-month Treasury yield is 2.22%, while the 10-year yields 3.06%. Here is a graph of the spread between the 2-year and 10-year.

10-year note minus 2-year note yield spread as a proxy for the steepness of the yield curve. Note: Coming out of a zero interest rate regime, a yield curve inversion is not required prior to a recession, and therefore, may never happen (Japan had five recessions since 1989 that were not preceded by a full yield curve inversion). However, the yield curve will still flatten ahead of an economic bust and widen steeply just as the bust is about to begin. Major lows in gold prices often coincide with an extremely flat or inverted yield curve. [PT]

In 2014, before the Fed had hinted at hiking rates, the spread was over 250 basis points (i.e., 2.5%). As we recall, the first hints were around July 2015. And the first hike was in December 2015. By that time, the spread had compressed to half - 124bps.

Now, it is down below 1/10th, a scant 27 bps. Mr. Fed Rate Hike, meet Dr. Falling Interest Rate Trend. He will take care of you, take care of you real good...

Fundamental Developments

We will look at the supply and demand fundamentals of both metals. But 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 fell dramatically this week, especially on Friday.

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 price of gold is down a bit (shown here as a rise in the dollar, measured in gold), and the scarcity of gold is up a bit.

The Monetary Metals Gold Fundamental Price fell $6 to $1,352. But the action was not in gold last week.

So let's look at silver.

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

In silver, the price rose and the co-basis fell. The Monetary Metals Silver Fundamental Price fell 11 cents to $15.83.

We hear many anecdotes of a pickup of retail silver product sales, but the data so far show this is mostly a repositioning of speculators - to get the market price closer to where it would be based on fundamentals.

Charts by StockCharts, Monetary Metals

Chart and image captions by PT