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Yield Curve Compression – Precious Metals Supply and Demand

Summary:
Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value. The Federal Reserve – carefully inching forward to Bustville People believe that the Fed must fight inflation, hiking rates to prevent overheating. Maybe. What the Fed is in fact doing is pushing the yield curve towards inversion. It’s not there yet, but right now the 3-month Treasury yield is 2.22%, while the 10-year yields 3.06%. Here is a graph of

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Hammering the Spread

The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.

The Federal Reserve – carefully inching forward to Bustville

People believe that the Fed must fight inflation, hiking rates to prevent overheating. Maybe. What the Fed is in fact doing is pushing the yield curve towards inversion. It’s not there yet, but right now the 3-month Treasury yield is 2.22%, while the 10-year yields 3.06%. Here is a graph of the spread between the 2- and 10-year.

10-year note minus 2-year note yield spread as a proxy for the steepness of the yield curve. Note: coming out of a zero interest rate regime, a yield curve inversion is not required prior to a recession and therefore may never happen (Japan had five recessions since 1989 that were not preceded by a full yield curve inversion). However, the yield curve will still flatten ahead of an economic bust and widen steeply just as the bust is about to begin. Major lows in gold prices often coincide with an extremely flat or inverted yield curve. [PT]

In 2014, before the Fed had hinted at hiking rates, the spread was over 250 basis points (i.e., 2.5%). As we recall, the first hints were around July 2015. And the first hike was in December 2015. By that time, the spread had compressed to half— 124bps.

Now, it is down below 1/10, a scant 27 bps. Mr. Fed Rate Hike, meet Dr. Falling Interest Rate Trend. He will take care of you, take care of you real good…

Fundamental Developments

We will look at the supply and demand fundamentals of both metals. But, first, here is the chart of the prices of gold and silver.

Yield Curve Compression –  Precious Metals Supply and DemandGold 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 fell dramatically this week; especially on Friday.

Yield Curve Compression –  Precious Metals Supply and DemandGold-silver ratio

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Yield Curve Compression –  Precious Metals Supply and DemandGold basis, co-basis and the USD priced in milligrams of gold

The price of gold is down a bit (shown here as a rise in the dollar, measured in gold), and the scarcity of gold is up a bit.

The Monetary Metals Gold Fundamental Price fell $6 to $1,352. But the action was not in gold last week.

So let’s look at silver.

Yield Curve Compression –  Precious Metals Supply and DemandSilver basis, co-basis and the USD priced in grams of silver

In silver, the price rose and the co-basis fell. The Monetary Metals Silver Fundamental Price fell 11 cents to $15.83.

We hear many anecdotes of a pickup of retail silver product sales, but the data so far show this is mostly a repositioning of speculators — to get the market price closer to where it would be based on fundamentals.

Charts by stockcharts, Monetary Metals

Chart and image captions by PT

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.

 

 

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Yield Curve Compression –  Precious Metals Supply and Demand 
 

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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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