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One Day the Volcano Will Erupt – Precious Metals Supply and Demand

Summary:
Keynesian Rot The prices of the monetary metals rose and ¢27 last week. The supply and demand fundamentals is the shortest section of this Report [ed note: we are excerpting the supply-demand section for Acting Man – readers interested in the other part of the report can find it here]. The eruption of Mt. St. Helens in 1980 – prior to the cataclysmic event, numerous small earth quakes and steam venting from fissures warned that something big was about to happen, even if no-one suspected the actual magnitude of the outbreak. The eruption was so powerful that a fairly large chunk of the mountain went missing in the proceedings. There are always accidents waiting to happen out there somewhere, and the modern-day fiat money system is

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Keynesian Rot

The prices of the monetary metals rose $11 and ¢27 last week. The supply and demand fundamentals is the shortest section of this Report [ed note: we are excerpting the supply-demand section for Acting Man – readers interested in the other part of the report can find it here].

The eruption of Mt. St. Helens in 1980 – prior to the cataclysmic event, numerous small earth quakes and steam venting from fissures warned that something big was about to happen, even if no-one suspected the actual magnitude of the outbreak. The eruption was so powerful that a fairly large chunk of the mountain went missing in the proceedings. There are always accidents waiting to happen out there somewhere, and the modern-day fiat money system is clearly one of them. There will be warning signals before it keels over – in fact, the final cataclysm usually happens fairly quickly, while the period that leads up to it tends to be a drawn-out affair. [PT]

This is because the actual data can be seen in a simple chart for each metal. If central banks were really buying mass quantities of gold in anticipation of a new gold-based global monetary system, or India were really importing all marketable gold, or the mainstream American public were desperately trading its dollars for gold, or China were really buying up all the physical gold to prepare for a gold-backed yuan (while selling paper gold, natch)…

…then the data would show this.

Mount Saint Helens was quiescent for a long time, until all of a sudden in 1980 it went wild with activity. There was an earthquake, then steam venting, then the side of the mountain began to bulge, then a second earthquake triggered that side to collapse. Then the volcano finally exploded.

The time from the first earthquake to the massive eruption was two months. We haven’t done the research, but we’d bet an ounce of fine gold against a soggy dollar bill that there were plenty of indications shown by sensitive seismographs for months prior the earthquake.

It is the same with gold price skyrocketing, which is just another way of saying dollar collapse. You won’t need to read about improbabilities like the world’s central banks desiring to give up power and move to gold, or mechanically impossible things like China retroactively declaring its currency to be gold-backed.

You will see it in the rumbling that becomes a sea change of attitudes, the earthquake of numerous big bankruptcies, and then the collapse of many (dollar-derivative) currencies.

One day, the volcano will explode. However, “today is not that day!” said Aragorn.

And here is Aragorn Cunctator again, pleading for patience: “Hold yer horses, lads… today is not the day.” [PT]

In the meantime, we can watch the seismograph, which is the gold basis. And there are other seismographs, like the spread between junk and Treasury bonds. Which has been moving up since the start of the month, and is now close to the high made at the start of the year.

If this spread is rising, it signals growing fear that high yield bonds will actually pay the investors’ capital back. So you see selling of junk / buying of Treasuries. And Treasury bond yields are falling, falling back into their decades-long trend. Which is a falling trend (sorry, we had to go for the pun).

TLT-JNK ratio moving up again (indicates rising credit spreads)  [PT]

A 10-year Treasury now pays 2.5% (while 10-year German Japanese government bonds pay negative, that is you pay to lend euros or yen to them). 10-year British gilts are now down to 1%. The Swiss yield is the most negative of all.

The capitalists and otherwise-free-marketers will tell you, “well, you see, actually, what had happened was, actually you should look at real yields aren’t negative.” To which the gold bugs will say “oh yes they are!”

10-year German Bund yield – back in negative territory (-0.025%). [PT]

We must say that, whatever the word for a hypothetical construct which does not exist, “real” is not that word. The interest rate that lenders are paid is negative. Who cares what a dismal model produced by the dismal science says?

So the fact remains. Keynesian rot has advanced beyond where Keynes predicted or perhaps intended. He said yield should be zero (and even generously allowed a tiny positive number to compensate the manager for his investment efforts). And now it’s negative in several major currencies. Euthanasia occurs even faster at negative yields than at zero.

At some point the sepsis of this disease will matter. We are not merely saying “what goes up must come down” which is an expression of a malevolent universe premise. There is no economic law that says achievement must be undone, successful must lead to failure, production must turn to ruin. The economic law is that if you render destruction profitable, then sooner or later you hollow out too much of the capital on which your civilization depends.

Fundamental Developments

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

One Day the Volcano Will Erupt – 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 was down a hair this week.

One Day the Volcano Will Erupt – 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.

One Day the Volcano Will Erupt – Precious Metals Supply and DemandGold basis, co-basis and the USD priced in milligrams of gold

The scarcity (co-basis) of gold did not rise. So whatever buying drove up the price was not a pyroclastic flow of the biggest volcano in American history. It was a tepid little flow of an ordinary creek wending its way.

Still, the Monetary Metals Gold Fundamental Price eked out another gain, up $15 to $1,512.

Now let’s look at silver.

One Day the Volcano Will Erupt – Precious Metals Supply and DemandSilver  basis, co-basis and the USD priced in grams of silver

If the scarcity of gold did not rise, that of silver fell noticeably. And the Monetary Metals Silver Fundamental Price fell 31 cents to $15.99.

We read, this week, a story touting a big sale of silver to China. If it were true at all, then it could mean that a large seller of silver was looking for a bid to dump the metal on. Every transaction has a buyer and a seller. There’s a common fallacy to assume that the big, famous party is the one driving the deal. But what really matters is whether the buyer took the offer price, or the seller accepted the bid.

Wednesday was a big day for silver, with the price moving up around ¢20 at 2pm EDT, or 18:00 in London. It seems the Fed surprised everyone said what we have been saying for years that they will stop hiking rates. Of course they will. What choice have they got?

Here is a graph of Wednesday’s action in both the price and basis for silver.

Silver (gray line) vs. silver basis (blue line) last Wednesday

Hours prior to the big price Fed announcement and price move, we see the basis rising. First (starting around 12:00 GMT) there is rising price and basis. Speculators may have been getting ahead of the Fed’s anticipated announcement. Then (at 13:300) price drops back down but basis continues to rise. Folks, this is selling of physical metal. Do the math: basis = future – spot. How else to explain a falling price and a rising basis?

Then when Fed announcement hit, price shoots up rapidly, and the basis — which had been subsiding — shoots up to a new level with the price. The price move was caused by buyers in the futures market.

The day began with silver at $15.30 and the basis at -55bps. It ended at $15.50 and -25bps.

© 2019 Monetary Metals

Charts by: StockCharts, BigCharts, 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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One Day the Volcano Will Erupt – 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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