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Zugzwang – Precious Metals Supply and Demand

Summary:
Respectable and Not so Respectable Assets The price of gold went up 8 bucks, and the price of silver went up a penny last week. These were not among the capital assets that could be liquidated for greater quantities of consumer goods last week. Nor were equities. A respectable, mother-in-law-proof speculation: the 10-year US treasury note. [PT] However, the consumer goods stockpile stored in treasury bonds (to extend our half sarcastic, half tongue-in-cheek analogy) increased this week. As the yield on the 10-year note fell from 1.675% to 1.515% — almost 10% of the yield was sucked out of this bond — the price rose. It went from 0.39 to 131.91 (near futures contract). Speculators this week forked over about 1.2% more capital for

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Respectable and Not so Respectable Assets

The price of gold went up 8 bucks, and the price of silver went up a penny last week. These were not among the capital assets that could be liquidated for greater quantities of consumer goods last week. Nor were equities.

A respectable, mother-in-law-proof speculation: the 10-year US treasury note. [PT]

However, the consumer goods stockpile stored in treasury bonds (to extend our half sarcastic, half tongue-in-cheek analogy) increased this week. As the yield on the 10-year note fell from 1.675% to 1.515% — almost 10% of the yield was sucked out of this bond — the price rose. It went from $130.39 to 131.91 (near futures contract).

Speculators this week forked over about 1.2% more capital for that same piece of paper, than they did last week. In a rational world, this would be a joke. People would be laughing, that in the deepest, most liquid bond market in the word, the price is so unstable!

If there were any merit to the idea of central planning (there isn’t), if the Fed had any legitimate mandate to fix a price (it hasn’t), it would be the price of treasuries. Of all the things that should be subject to unleashed speculation (no things should, though certain commodities are subject to production risk), the last thing in the financial universe that ought to suffer this malady is the asset deemed to be risk-free (it isn’t), and the basis of the monetary system!

Keynes smirked that not one in a million people could see the problem. That’s because they’re all wagering around the table, rolling the dice and yelling “come on, baby needs a new pair of shoes!”

Zugzwang – Precious Metals Supply and DemandJ.M. Keynes in full smirk mode. Murray Rothbard had this to say about Keynes: “To sum up Keynes: arrogant, sadistic, power besotted bully, deliberate and systemic liar, intellectually irresponsible, an opponent of principle, in favor of short term hedonism and nihilistic opponent of bourgeois morality in all of its areas, a hater of thrift and savings, somebody who wanted to liquidate the creditor class, exterminate the creditor class, an imperialist, an anti-Semite, and a fascist. Outside of that I guess he was a great guy.”  It’s probably fair to say that Rothbard wasn’t the biggest fan of Keynes. Neither are we. In the past we have at times pondered how many decades of progress Western civilization has lost by dint of adopting the garbled economics and execrable statism propagated by Keynes, but if there had been no Keynes, someone else would undoubtedly have provided the political-bureaucratic classes with a “scientific” fig leaf justifying their depredations. [PT]

Not so many people bet “DO NOT PASS” (i.e. gold) last week. Who would be so antisocial, when the shooter has hot dice? OK, so the stock market didn’t go up. But bonds are a respectable speculation, that your mother-in-law would not worry what would the neighbors think.

Bitcoin is not a respectable bet (though it’s improving) and it increased the amount of groceries by about a week’s worth. Oil is more respectable, but groceries drained out of it like oil drains out of an old British car sitting on the driveway.

We read some stories last week that another highly-respectable asset went down. High-end real estate in Manhattan (we have also read about this phenomenon in London and Sydney).

With WeWork cancelling its IPO and becoming the latest equities scandal, it raises the question will speculators want to keep feeding capital-consuming enterprises such as Uber? Can the zombie corporations keep borrowing to spend, while the number of zombies grows due to monetary policy?

Zugzwang – Precious Metals Supply and DemandA recent picture of former We Works CEO Adam Neumann. As the now-defunct IPO prospectus of “We” revealed:We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.”  Evidently their mission was not to generate anything resembling a profit, since the company reported losses that were not only vast, but actually exceeded its revenues, which strikes us as a rather rare feat. The picture above prompted the author of Grant’s “Almost Daily” report to wonder whether Neumann’s shoes were repossessed by We’s creditors. [PT]

Photo via twitter.com

The Fed and other central banks will be fighting to keep the music going, liberally putting pennies in the fuse boxes at the first sign that a credit circuit might shut down. But the Fed is neither omnipotent nor omniscient. It cannot fix everything, or even know about everything.

What is it doing about the cash flow pressure on banks due to the inverted yield curve (banks borrow short — which is now a higher interest rate — and lend long)? What is it doing to address the fact that banks are obliged to start giving up some of their lending income via “repo” transactions on bonds?

Our gut feel is that this explains why gold is $1,500 whereas it had been hundreds of dollars less as recently as May. After so many years of consumer goods dripping out of the gold storage tank, to pour into the stock market tank, it seems like the markets may be ready to reverse.

We have one additional thought. If the Fed is not successful in suppressing a crisis, then obviously stocks will sell off. And people will likely buy gold. But if the Fed is successful, people may buy gold in response to whatever monetary actions the Fed will take.

The term zugzwang from chess seems applicable.

Zugzwang – Precious Metals Supply and DemandA famous Zugzwang problem by Thomas Taverner. White to move plays 1. Rh1! – thereafter, every move available to Black will lose (examples: 1…Bg5 2. Qh2 mate; 1…Ke3 2. Qh6 mate; etc.). [PT]

Fundamental Developments

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

Zugzwang – 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 rose slightly this week.

Zugzwang – 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.

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

The scarcity (i.e., the co-basis) rose a little bit last week. But the Monetary Metals Gold Fundamental Price dropped $19, to $1,440. This is not only below the market price, but it is falling since the start of September.

Now let’s look at silver.

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

In silver, there was a small rise in the scarcity also.

And like in gold, the Monetary Metals Silver Fundamental Price dropped, 49 cents to $16.81. As has been the case in gold, the fundamental price has been dropping since the start of last month.

© 2019 Monetary Metals

 

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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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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