Is Silver Hard of Hearing?
The price of gold inched down, but the price of silver footed down (if we may be permitted a little humor that may not make sense to metric system people). For the gold-silver ratio to be this high, it means one of two things. It could be that speculators are avoiding the monetary metals and metal stackers are depressed. Or that something is going on in the economy, to drive demand for the metals in different directions.
As a rule, the gold-silver ratio acts as a proxy for credit spreads - this is attributable to the fact that silver prices are partly driven by the metal's large industrial demand component (by contrast, the vast bulk of gold demand consists of monetary or investment demand; industrial and fabrication demand in the gold market is negligible by comparison). In the chart above, we compare the gold-silver ratio to the IEF-JNK ratio, which serves as a proxy for corporate credit spreads (note: "unadjusted" means that only prices are compared, not total returns - interest payments received by holders of IEF and JNK are not included). An interesting divergence has emerged since the 2014-2016 oil patch mini-bust - while the gold-silver ratio is streaking to new highs, the IEF-JNK ratio has established a lower high in late 2018. We believe this is mainly due to the massive distortion of credit markets in the wake of the QE and ZIRP/NIRP policies pursued by the world's largest central banks. One of these markets is wrong and it is a good bet that the market that has been manipulated by central bank interventions is the one that is giving a false signal. [PT]
One metal is money without counterparty risk. The other is also money but a big part of its demand is from its use in a wide variety of products.
Our president simultaneously told us that the economy is strong, and that the Fed ought to lower rates. If the economy were strong, the demand for silver should be higher. If the Fed lowers rates, then that should rapidly increase the quantity of money and, every speculator knows that should drive prices up.
From the price action, one would say that silver does not seem to be getting either of these messages.
Incidentally, we are doing something to affect the demand for silver - we are paying interest on silver, in silver. We are opening a fresh silver lease deal this week. Contact us, if interested (pun intended).
Anyway, let's look at the supply and demand picture of silver (and gold too). But, first, here is the chart of the prices of gold and silver.
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). The ratio went up again this week. It is now near a very long-term high.
Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.
The scarcity (i.e., the co-basis) as measured by the June contract continues to rise. The gold basis continuous also rose, though less.
The Monetary Metals Gold Fundamental Price is up three bucks, to $1,459.
Now let's look at silver.
The temporary backwardation in the May contract has skyrocketed to over 2%. This means that you could simultaneously sell five big bars of silver, and buy a May silver futures contract to recover your position and pocket about 4 cents an ounce.
The May contract is below spot. More precisely, the offer price for May is below the bid price on spot. How could this happen?
Selling of the May contract, without commensurate selling of spot metal (or other contracts). What would cause unbridled selling of just one contract, the front-month contract? We will give a hint.
The May contract is about to expire. Someone needs to sell before First Notice Day, before they could be asked to pay up $75,000 in cash per contract. Lots of someones.
This little idea right here - that we can see the urgent selling of the expiring contract - is the key to understanding why the price-suppression story is bunk.
The bullion banks which are short hold arbitrage positions. They have metal (though not necessarily stored in COMEX warehouses) and they have shorted futures contracts to make the basis spread. As they can deliver, they don't have any urgency to close their contracts. If you are short, you buy to close. And the data shows again and again, that the pressure on the expiring contract is not from buying.
It is from selling. It comes from the longs who sell with urgency, as they cannot come up with the cash to buy the metal.
The longs are naked, i.e., they are speculators. The shorts are not naked, i.e., they are not carrying a big short futures position to suppress the price.
The Monetary Metals Silver Fundamental Price was down another 9 cents at $16.09.
© 2019 Monetary Metals
Charts by: StockCharts, Monetary Metals
Chart captions and edits by PT
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.