We have been calculating a fundamental value of the ratio above the market value from the end of July, though it dipped in November. This week, both the market and fundamental rose with a vengeance.
We will discuss the fundamentals and how they changed this week. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio rose sharply.
In this graph, we show both bid and offer prices for the gold-silver ratio. If you were to sell gold on the bid and buy silver at the ask, that is the lower bid price. Conversely, if you sold silver on the bid and bought gold at the offer, that is the higher offer price.
For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.
Here is the gold graph showing gold basis and cobasis with the price of the dollar in gold terms.
The cobasis (our measure of scarcity) broke out, rising noticeably, as the price of gold fell slightly.
The Monetary Metals Gold Fundamental Price is up 5 bucks to $1,312, notwithstanding that the market price is down this week.
Now let’s look at silver.
In silver like in gold, we see the cobasis up sharply. However, unlike in gold, the price dropped quite a lot.
And so we have a good news / bad news scenario. The good news is that the Monetary Metals Silver Fundamental Price is now about 50 cents over the market price. The bad news is that it is down 32 cents.
If you trade the fundamental, this may be a good time to buy silver. Or if you are a contrarian. The price has been sold down a lot, to a level not seen since August. If you prefer to do technical analysis on the fundamentals (the fundamental price is not technical analysis in itself, notwithstanding some have claimed that), then you may see momentum developing to the downside and wish to wait for it to stabilize.
All we can say is that, if you back out the actions of the speculators, supply and demand of physical metal meet around $16.92. The market price closed on Friday at $16.41.
The fundamentals could weaken further. The market price could fall further without change in the fundamentals.
It is not the purpose of this letter to say what traders ought to do. We can say that, in our fund (which trades the gold-silver ratio) we are long silver for the first time since the summer.
The SPDR Gold Trust ETF (GLD) fell $0.34 (-0.28%) in premarket trading Monday. Year-to-date, GLD has gained 10.36%, versus a 20.15% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Monetary Metals.