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Precious Metals Supply and Demand

See the introduction and the video for the terms gold basis, co-basis, backwardation and contango.

Back to the Happy Place Amid a Falling Dollar

The prices of the metals dropped this week, $24 and $0.38. This could be because the asset markets have returned to their happy, happy place where every day the stock market ticks up relentlessly.

Happy Place

Sometimes, happiness is fleeting… - Click to enlarge

Dollar Bid Price

The major currencies have been rising all year—we insist that this is a rise in these dollar derivatives, not a fall in the dollar—and this is a risk-on pattern. Borrow dollars, sell dollars, buy another currency to buy an asset and pocket (A) the yield of the asset, (B) the rise in price of that asset, and (C) the rise in the currency.

The dollar has been falling this year. You can’t measure it in terms of its derivatives such as euro. You can measure it in terms of gold. Here is a chart, showing the drop in the dollar, from about 27 milligrams at the start of January to 23.5mg on Friday. The dollar has fallen about 13%.

Dollar Bid Price

(see more posts on dollar price, )
Dollar Bid Price

The bid on the dollar in milligrams of gold and grams of silver. Down it went this year… - Click to enlarge

Precious Metals – Fundamental Developments

Will the dollar fall further? As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.

Gold and Silver Prices

(see more posts on gold price, silver price, )
Gold and Silver Prices

Gold and silver prices in USD terms - Click to enlarge

Gold:Silver Ratio

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

 

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

(see more posts on gold silver ratio, )
Gold:Silver Ratio

Gold-silver ratio, bid and offer - Click to enlarge

Gold Basis and Co-basis and the Dollar Price

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.

Gold Basis and Co-basis and the Dollar Price

(see more posts on dollar price, gold basis, Gold co-basis, )
Gold Basis and Co-basis and the Dollar Price

October gold basis, co-basis and the dollar priced in milligrams of gold - Click to enlarge

Silver Basis and Co-basis and the Dollar Price

This is the October contract, which is under selling pressure (pushing down basis and up co-basis). This week, the moves in the basis and co-basis are due to this contract roll process (see the continuous gold basis chart here). The dollar rose somewhat (the inverse of the falling price of gold).

Our calculated Monetary Metals gold fundamental price dropped $9, to $1,370.

Now let’s look at silver.

Silver Basis and Co-basis and the Dollar Price

(see more posts on dollar price, silver basis, Silver co-basis, )
Silver Basis and Co-basis and the Dollar Price

September silver basis and co-basis and the dollar priced in grams of silver - Click to enlarge

 

In silver, being the December contract which is farther away, it’s clearer. There was little move in the basis (around 0.07%) as the price of the dollar went up / price of silver went down.

Our calculated Monetary Metals silver fundamental price fell $0.50 to $17.38.

 

© 2017 Monetary Metals

Full story here
Keith Weiner is president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona. In March 2015 he moved his Gold Standard column from Forbes to SNBCHF.com.
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