This week, the prices of gold and silver were down 36 bucks and 66 cents, respectively. Prices had been falling the prior Friday, October 25. But CNBC ran a story claiming that Quantitative Easing will continue. That was enough to arrest the fall for the remainder of that trading day, and of course Europe and Asia were offline by then. It seems the story’s effect was exhausted the same day it hit.

As always, we want to know: what are the fundamentals? The speculators try to front-run the fundamentals, and sometimes end up front-running only themselves (as on Oct. 25). The speculators cannot move the price very far, or hold it there for very long if hoarders of real metal are selling into speculative buying, or vice versa.

We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, hoarding or dishoarding.

One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production can be measured in months. The world just does not keep much inventory in wheat or oil.

With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

Here is the graph of the metals’ prices.

The Prices of Gold and Silver

Here is a graph of the ratio of the gold price to the silver price. This shows how many ounces of silver one needs, to buy an ounce of gold. There was as slight rise this week.

The Ratio of the Gold Price to the Silver Price

 

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide terse commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

The Gold Basis and Cobasis and the Dollar Price

For a few weeks, the price of the dollar had been falling and along with it the cobasis and the scarcity of gold. This week the dollar rose and gold’s scarcity is still tracking with it.

Last week, we channeled Obi Wan Kenobe to say that it was probably not the gold price breakout you were looking for. This week, the gold price is down sufficiently to bear out that prediction. Next week, maybe we shall see a divergence of the cobasis from the dollar price, which will signal a change in the fundamentals.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

Silver is in a similar trend, though the cobasis is at a much lower level. And it’s curious that the cobasis turned down again on Friday, which did not occur in gold.