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Why Silver Went Down – Precious Metals Supply and Demand

Summary:
Rumor-Mongering vs. Data The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent.   Reportedly silver was already assassinated in the late 19th century… so last week they must have assassinated its corpse. [PT] Illustration taken from ‘Coin’s Financial School’   The facile answer is manipulation. With no need of evidence — indeed with no evidence — one can assert this and not be questioned in the gold and silver communities. We have recently come across a term normally used to describe Leftists and Social Justice Warriors, “virtue signaling”. One piously declares that one supports the cause, one speaks truth to power, one sticks it to The Man, well you get the idea. The concept of virtue signaling seems equally appropriate to those who sing the chorus on every price drop, “manipulation.” Besides, we have peeps in high places in London and New York and Beijing, and they tell us silver is manipulated… Actually, we rather prefer to look at data than listen to whispers.

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Rumor-Mongering vs. Data

The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent.

 

Why Silver Went Down – Precious Metals Supply and DemandReportedly silver was already assassinated in the late 19th century… so last week they must have assassinated its corpse. [PT]

Illustration taken from ‘Coin’s Financial School’

 

The facile answer is manipulation. With no need of evidence — indeed with no evidence — one can assert this and not be questioned in the gold and silver communities. We have recently come across a term normally used to describe Leftists and Social Justice Warriors, “virtue signaling”.

One piously declares that one supports the cause, one speaks truth to power, one sticks it to The Man, well you get the idea. The concept of virtue signaling seems equally appropriate to those who sing the chorus on every price drop, “manipulation.”

Besides, we have peeps in high places in London and New York and Beijing, and they tell us silver is manipulated…

Actually, we rather prefer to look at data than listen to whispers. What would the data show if demand for physical silver metal was robust and rising while someone sold so many futures contracts that the price of the metal was forced down just about a dollar?

The basis and co-basis are spreads between physical silver metal and futures. The scenario we just described would collapse the basis and skyrocket the co-basis.

Is that what happened last week?

Before we get that, we want to note that crude oil fell from $53.33 last week to $48.49, or -9%. Copper fell from $2.70 to $2.60, or -3.7%. Wheat fell from $4.53 to $4.40, or -2.9%. People miscall this deflation.

 

Why Silver Went Down – Precious Metals Supply and DemandCommodities didn’t have a good week, as their recent decline accelerated. We would point out that prior to this decline, speculative net long positions in a number of industrial commodity futures had reached rarely and in some cases never seen extremes [PT] – click to enlarge.

 

We don’t know whether this will affect the Fed’s seeming commitment to damn the economy, full rate hikes ahead. However, we do know that sentiment bleeds from one speculative asset to another (and in a near-zero interest rate environment, all assets are used by speculators).

“If energy, industrial metal, and food are going down, then surely silver should go down too,” seems to be the logic.

At least last week.

 

Fundamental Developments

We are much more interested in the supply and demand fundamentals. We acknowledge that speculators can temporarily move prices—sometimes a lot—but we firmly insist that eventually the market price reverts to the level called for by supply and demand.

So what happened to those fundamentals? Below, we will show the only true picture of the gold and silver supply and demand. But first, the price and ratio charts.

 

Why Silver Went Down – Precious Metals Supply and DemandPrices of gold and silver – click to enlarge.

 

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved up sharply last week.  If we were chartists, we might note that the ratio seems to be making a series of higher lows since mid-July.

 

Why Silver Went Down – Precious Metals Supply and DemandGold-silver ratio – click to enlarge.

 

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.

 

Why Silver Went Down – Precious Metals Supply and DemandGold basis and co-basis and the dollar price – click to enlarge.

 

As the price of the dollar rose through the week, so did the co-basis. The price of the dollar is the inverse of the price of gold in dollar terms, and allows us to see a clearer picture. It is not gold going anywhere, but the dollar going up and down. The co-basis is our indicator of scarcity.

While the dollar went up 0.5mg gold, the co-basis went up 24bps. This is the old pattern, rising gold scarcity as the dollar rises. The same happened in farther contracts, to a smaller degree.

While the market price of gold fell $24, our calculated fundamental price went down only $15. It is more than $150 over the market price.

Now let’s look at silver.

 

Why Silver Went Down – Precious Metals Supply and DemandSilver basis and co-basis and the dollar price – click to enlarge.

 

The co-basis in silver actually fell. It didn’t fall a lot, but this drop came in a week when the price fell substantially. This puts the lie to the allegation of manipulation. Selling of futures would push the co-basis up.

Silver fell because owners of metal decided to sell and/or buyers of physical metal slowed their purchases. We can debate why they did that, but not the meaning of the data.

Note also the much lower absolute level of the silver co-basis. Silver is -86bps compared to gold at +8bps (i.e., a slight temporary backwardation).

The silver fundamental price also fell, about half as much as the market price. It is now $1.03 above the market price.

This means that while those who need to unload their silver are unhappy, those planning to load up can now exchange the same quantity of Federal Reserve Notes for more silver than last week. With (slightly) better fundamentals too, as last week the fundamental price was only $0.87 above the market price.

The only question on that front is the trend. For two weeks, the fundamental price has become weaker.

 

© 2017 Monetary Metals

 

Charts by: StockCharts, Monetary Metals

 

Chart and image captions by PT where indicated

 

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

Keith Weiner

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 writes about money, credit and gold. In March 2015 he moved his column from Forbes to SNBCHF.com.

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