The Magic Doesn't Always Work - Precious Metals Supply And Demand

by: Keith Weiner

The weekly closing prices of the precious metals were up +$5 and +¢11.

The price of the dollar is down.

Silver shows the rise in price and rise in scarcity, including of the silver basis continuous.

The Week Ends with a Surprise

The weekly closing prices of the precious metals were up +$5 and +¢11. But this does not tell the full story of the trading action. Prices were dropping until Friday. More precisely, Friday 8 a.m. in New York or 1 p.m. in London.

Gold and silver - back in demand on Friday… [PT]

At that moment, a light cabal conspiring to jack the price struck traders began buying. The end result was the prices, especially of silver, rose on the day and the week. And it happened at the end of a week with the stock market selling off.

Interesting. And a week where the junk-Treasury spread widened and Treasury yields fell. And even the bulls' favorite commodity to tout, copper, dropped a bit.

Last week, we quipped that this is how the system is supposed (by our central planners) to work: more borrowing of more dollars to buy all assets including other currencies. Well, this week, the magic wasn't working.

Fundamental Developments

Anyways, let's look at the only true picture of the supply and demand fundamentals of gold and silver. 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 was down a bit 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 price of the dollar is down (the inverse of the price of gold, in dollars, which is up). And we see rising scarcity (i.e., the co-basis). At least in the April contract - the gold basis continuous is basically flat. This makes sense, the price is not moving much either.

And it means that there is not some kind of magical demand for "phyz" coming out of nowhere.

The Monetary Metals Gold Fundamental Price made another new high, up now to $1,437.

Now let's look at silver.

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

Silver shows the rise in price and rise in scarcity, including of the silver basis continuous.

Here is a graph of the silver price and basis, intraday on Friday.

Silver price (gray line) and silver basis (blue line) intraday on Friday

The big price move was about ¢25. There is a basis move upward, along with it, but the basis move is muted for a price move of this size. The basis had been humming along around +5bps to +10bps. After the price jumped, the basis was +15bps to +20bps.

And it is interesting that before the price moves, the basis drops to around -10bps. That was a surge of buying of physical metal. About 30 minutes later, the price begins rising. Then it's another 30 minutes before the basis begins rising, which means that futures buyers are beginning to react. It's about 90 minutes before the basis returns to its starting point, but by then, the price of silver is $15.28 compared to $15.10 previously.

This zoom into the details confirms why our calculated fundamental price rose on Friday. It will be interesting to see if there is follow-through buying of metal.

The Monetary Metals Silver Fundamental Price is down another 6 cents to $16.10 (on the week), though it was down more and then rising in the second half of the week.

Charts by: Monetary Metals

Chart and image captions by PT

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.