In ordinary terms (that is, backwards) gold went down from 1337 to 1331, or a six buck drop. Silver fell 20 cents, to $17. Among many other reasons, we don’t like this view because it turns money into just another colored chip for betting in the dollar casinos. We say the dollar went up, even if the whole world says that gold went down.
We note that Copernicus said the Earth revolved around the sun even though the whole world (no pun intended) said the sun revolved around Earth. He knew that a true idea had to win in the end, and in his day there was not a free market for ideas. We stand in awe of him, as he knew that men had been killed for lesser heresies than his own.
We rest comfortably, knowing that we are not as risk of being burned at the stake to say that gold is at the center of the economic universe, and the dollar moves around gold.
Let’s take a look at the only true picture of the supply and demand fundamentals for the metals. But first, here is the chart of the prices of gold and silver.
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.
There was not a lot of price action or basis action this week.
The Monetary Metals Gold Fundamental Price rose $6 this week, to $1,351.
Let’s take a look at the 6-month gold forward rate (MM GOFO?). It was rising through Christmas, but afterwards fell sharply.
The rise corresponds to the increasing price through that time (about $46). This is well understood, as the metal becomes more abundant as the price rises (in normal times, anyways). The sharp drop on Dec 28 is what needs explaining.
Above is an animated GIF showing the forward term structure through this same period. You can see, not just a single number moving every day as in the graph of the MM GOFO-6. You can also see the changing shape of the structure.
Note that the drop in GOFO is concentrated in the short-end of the curve. And indeed the long-end recovers its previous level even when the short end has not. So what’s going on?
The first clue is that this occurs at year-end. That points to some kind of “window dressing”, where someone is making sure the books close with good numbers. But who is the most likely candidate–and how would their dressing of their windows do this to GOFO?
Recall that lease rate = LIBOR – GOFO. A falling GOFO means higher lease rate. Who would be pushing up the lease rate?
We believe it’s gold mining companies rushing as much doré to the refiners as they can, so they can get credited with gold in their accounts, and book the revenue in calendar 2017. The refiners, of course, cannot produce the finished bars and sell them into the market. So they lease the gold in the meantime. This pushes up the lease rate. It is demand for gold metal, at least for the time needed to process the doré and sell the gold bars.
Now let’s look at silver.
In silver, we see the familiar pattern of rising price of the dollar (i.e. falling price of silver, measured in dollars) accompanied by rising cobasis (i.e scarcity). Also, we are starting to see the pressure on the March contract, which tends to push basis down and cobasis up.
The Monetary Metals Silver Fundamental Price fell 28 cents to $17.03.
The SPDR Gold Trust ETF (GLD) rose $0.11 (+0.09%) in premarket trading Monday. Year-to-date, GLD has gained 2.31%, versus a 5.07% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Monetary Metals.