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The Motte and Baley Fallacy – Precious Metals Supply and Demand

Summary:
Spoofers vs. the Underlying Trend The price of gold fell seven bucks, but the price of silver was up %excerpt%.16. In other words, the gold-silver ratio did a little more reverting to that long-forgotten mean. Launceston Castle in Cornwall, an example of a motte and baley fortification. The castle was built in 1067-1071 AD, either by the Count of Mortain (the half-brother of William the Conqueror) or Brian of Brittany. [PT] Photo credit: P. Vincent Some story or other of a bank spoofing orders in the gold market came up this week. Spoofing is when a trader enters a large bid or offer on an exchange, and quickly cancels it. The purpose is to try to manipulate the price. Of course, market makers must be constantly entering and canceling bids

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Spoofers vs. the Underlying Trend

The price of gold fell seven bucks, but the price of silver was up $0.16. In other words, the gold-silver ratio did a little more reverting to that long-forgotten mean.

The Motte and Baley Fallacy – Precious Metals Supply and DemandLaunceston Castle in Cornwall, an example of a motte and baley fortification. The castle was built in 1067-1071 AD, either by the Count of Mortain (the half-brother of William the Conqueror) or Brian of Brittany. [PT]

Photo credit: P. Vincent

Some story or other of a bank spoofing orders in the gold market came up this week. Spoofing is when a trader enters a large bid or offer on an exchange, and quickly cancels it. The purpose is to try to manipulate the price.

Of course, market makers must be constantly entering and canceling bids and offers, as they track multiple markets and try to keep the prices of gold in the spot and futures market connected, plus GLD and other exchange-traded funds, plus other instruments.

But let’s concede that in this particular story, the trader had both intent and effect. He moved the price a few pennies or a dollar, for a moment. Long enough for him to make his daily profit quota.  We encountered some folks on social media trumpeting this story as proof positive that gold is manipulated.

How spoofing works, from the WSJ (left). Right: a general illustration and a look at the CME crude oil futures order book. Spoofing is a type of short term price manipulation, but it cannot alter the overarching trend. [PT]

This is a textbook example of the Motte and Bailey Fallacy. Like in a medieval fortification, the motte is an easily defensible position and the bailey is where people want to live. Or in argumentation, the bailey is the conclusion that the arguer wants to sell.

In the gold manipulation conspiracy theory, the bailey is the tempting idea that the price of gold ought to be much higher. Say, $50,000, which is not even the most extreme claim we have seen. This is an extraordinary claim, to say the least. Extraordinary claims require extraordinary evidence (and we have argued that this evidence does not exist, many times).

So the motte and bailey fallacy is used, when opportunity arises. Consider the case of this spoofer (we did not take note of which bank, which trader, or when this occurred). So this guy played a game to scalp a few pennies from other market participants who were active in the market at that moment.

Is this bad behavior? We won’t debate that point right, and for purposes of this discussion let’s concede yes. Yes, it’s bad. Yes this guy is a bad guy who did a bad thing. This particular profit he got in the zero-sum game of speculation was illicit.

OK, that is the motte. No one can argue it didn’t happen (assuming the evidence persuades the regulators to bring charges, and he is convicted). But the question that always arises with motte and bailey is: so what? Does this prove that the price of gold is long-term suppressed very far below what it ought to be?

That’s the indefensible baily. And the purpose of this fallacy is to avoid the need to defend the baily. They just assert the motte, and the bailey is assumed to be proven. This fallacy occurs in many other political debates, by the way.

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 Motte and Baley Fallacy – 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 substantially again this week.

The Motte and Baley Fallacy – Precious Metals Supply and DemandGold-silver ratio, bid and offer

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

The Motte and Baley Fallacy – Precious Metals Supply and DemandGold basis, co-basis and the USD priced in milligrams of gold

Scarcity (i.e., the co-basis) just seems like it wants to perk up. Last week, we noted that:

“…the fundamental price is below the market price for the first time since the end of 2017 (which was a brief spike down in the fundamental price, a flash in the pan).”

This week, the Monetary Metals Gold Fundamental Price is back up to $1,421. So much for that flash in the pan.

Now let’s look at silver.

The Motte and Baley Fallacy – Precious Metals Supply and DemandSilver basis, co-basis and the USD priced in grams of silver

Scarcity as depicted in the near-month contract is up a bit, but not in terms of the continuous silver basis. So while the price of silver diverged to the upside from gold, the fundamentals moved a bit in the opposite direction.

The Monetary Metals Silver Fundamental Price dropped 29 cents to $16.21. That’s not a huge amount, but it does puts the silver fundamental price below the market price.

© 2019 Monetary Metals

Charts by Monetary Metals, Trillium Management, Zerohedge

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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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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