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The Great Debasement – Precious Metals Supply and Demand

Summary:
Fiat Money Woes Monday was Labor Day holiday in the US. The facts are that the euro lost another 1.4%, the pound another 1.1%, and the yuan another 0.9% last week. Assorted foreign fiat confetti against the US dollar – we have added the Argentine peso as well, as it demonstrates what can happen when things really get out of hand. [PT] So, naturally, what is getting play is a story that Bank of England governor Mark Carney said the dollar’s influence could decline. This is somewhat ironic, because in true Keynesian fashion, Carney believes in a “savings glut” which he laments has caused “low inflation”. Everyone should be bellowing from the rooftops, not about the greatly exaggerated death of the dollar, but that major currencies are

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Fiat Money Woes

Monday was Labor Day holiday in the US. The facts are that the euro lost another 1.4%, the pound another 1.1%, and the yuan another 0.9% last week.

Assorted foreign fiat confetti against the US dollar – we have added the Argentine peso as well, as it demonstrates what can happen when things really get out of hand. [PT]

So, naturally, what is getting play is a story that Bank of England governor Mark Carney said the dollar’s influence could decline. This is somewhat ironic, because in true Keynesian fashion, Carney believes in a “savings glut” which he laments has caused “low inflation”.

Everyone should be bellowing from the rooftops, not about the greatly exaggerated death of the dollar, but that major currencies are dropping so fast! Analysts should be inquiring why they are falling, while their paradigm encourages them to think that it is the dollar which is, or should be, falling.

We think it is entirely appropriate to measure these currencies by the US dollar, as they are derived from the dollar. And we measure the dollar by gold. Since the recent peak, at 24.51 milligrams of gold at the beginning of May, the dollar has fallen 12% to 20.34mg. It now seems to be within striking distance of its all-time low set in 2011, about 16mg.

The Great Debasement – Precious Metals Supply and DemandThe global fiat money devaluation race against gold. [PT]

In gold terms, since that same date, the euro has fallen over 18%. We don’t know why Europeans aren’t screaming “bloody murder” at this not-so-subtle looting. And to a somewhat lesser degree, Americans should be right there yelling too.

Instead, gold owners in both currency areas are celebrating. That’s because they adhere to the dollar paradigm. Although they know that the dollar loses value, they measure the value of everything else in dollars. They think gold is going up.

We have a radical idea: the dollar’s loss can be measured in gold.

That means: if the price of gold doubles, the gold owner may have twice as many dollars but those dollars are each worth half as much. It is good to own gold, not for making profits but for avoiding the loss of the currency.

The dollar’s loss cannot be measured in consumer goods. That’s because every producer is constantly working to cut costs and prices. And every regulator, litigator, and taxinator is constantly working to add useless ingredients and drive up costs. Consumer prices are not stable.

It can be measured in gold. That’s because virtually all of the gold mined over thousands of years of human history is still in human hands. Gold has (by a country mile) the highest ratio of stocks to flows, and hence the greatest stability.

Consumer goods have rapidly declining marginal utility. Gold has non-declining marginal utility, which is why we continue to accumulate. The market continues to absorb gold mine production, despite having accumulated so much. There is no apparent limit, in contrast to wheat, or even oil, or even copper.

It is a crazy idea, using gold to measure value. Or so it seems — from the prevailing dollar / Quantity Theory of Money / purchasing power / inflation paradigm.

It was a fascinating week of price action. The price of gold dropped $7 — but the price of silver went up almost a buck (96¢). Read on to see if this move was due to leveraged speculators buying futures, or fundamental buying of silver metal.

It is worth noting that, despite negative interest rates, the collapse (we assume) of business in Hong Kong, trade wars and tariffs, and a likely credit crisis coming, there is no sign of backwardation in either metal. So there is no incipient gold or silver crisis.

Fundamental Developments

Now let’s look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.

The Great Debasement – 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). The ratio dropped sharply week.

The Great Debasement – Precious Metals Supply and DemandGold-silver ratio, bid and offer. The ratio has dropped quite sharply of late, but remains far from its long-term average, not to mention previous lows. [PT]

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

The Great Debasement – Precious Metals Supply and DemandGold basis, co-basis and the USD priced in milligrams of gold

There is a bit of a rise in the scarcity of gold to the market (i.e., the co-basis), at least in the October contract, though not so much in the gold basis continuous. The action was not in gold last week.

And the Monetary Metals Gold Fundamental Price dropped just as much as the market price, -$7 to $1,536.

Now let’s look at silver.

The Great Debasement – Precious Metals Supply and DemandSilver basis, co-basis and the USD priced in grams of silver

Last week we wondered, “Is the co-basis rolling over?”

There was no rollover, as we can see it has risen even despite a big drop in the price of the dollar from 1.79 to 1.69 grams (i.e., a big increase in the price of silver, measured in dollars). Silver is no more abundant with a price over $18 than it was a dollar lower.

The fundamental price moved up $1.27 to $18.31.

This week, the ferocious buying of silver was led by buyers of physical metal, not leveraged futures market speculators.

This week, our rhetorical question is: “will the gold-silver ratio revert to the mean?”

The Great Debasement – Precious Metals Supply and DemandGold-silver ratio, long term – still a long way from levels seen in the past… [PT]

The mean, as you can see from this graph is just over 60. At today’s price of gold, that would put silver at $23.85. Or if gold keeps going up, say to $2000, then silver would be over $31.

© 2019 Monetary Metals

Charts by bigcharts, 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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The Great Debasement – Precious Metals Supply and Demand 
 

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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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