A Sense of Foreboding
This was a shortened week, due to the American holiday of July 4, celebrating the start of the war that lead to "Amexit", 240 years ago.
The prices of the metals were up this week, +$25 in gold and +$0.48 in silver. The gold to silver ratio dropped a fraction of a point, showing that the silver price gain was the greater. This is fairly typical in a market where the prices of the metals are rising (but not guaranteed!)
There is a sense of foreboding among contrarians and central bank skeptics that the other shoe has yet to fall following the "Brexit" referendum. Meanwhile, mainstream commentators are almost gloating that British stocks (to say nothing of US stocks) have recovered their losses since the vote was tallied. In their unseemly rush to declare the all's clear, they omit to mention that the British pound is down from about $1.45 to about $1.29, or -11%. The British people have so far lost 11% of their savings, and unlike the FTSE, the pound has so far not shown any sign of recovering. Maybe it will in the future, but it's certainly premature to call that.
On the other side, the gold bugs are doing a bit of gloating of their own. You see, gold has gone up from £834.05 just before the vote tally to £1054.55 at Friday's close, or +26%. In US dollars, the price of gold has gone up in the same period $1251.58 to $1365.85, or 9%.
Who is right? Are British bullion dealers correct to say that owners of the metal have gotten 26% richer? Or are American counterparts smarter, as they cheer almost as loudly for 9%? Is the dollar realer than the pound? Is either one of them suitable to measuring gold?
In reality, the pound has gone down from 37.3 milligrams gold to 29.5mg, a drop of 21%. The dollar has fallen, but less.
We think it's OK to measure the dollar's derivative currencies (such as the pound) in terms of the dollar. It's fair to say the pound fell from $1.45 to $1.29. However, we argue it's not OK to measure gold in terms of dollar. Gold does not go up or down.
The dollar has value so long as gold bids on it. Certainly, it will become worthless the day this bid is withdrawn. At current prices, and under current market conditions, there is no sign of this withdrawal.
There was no sign of the bottom of the North Atlantic from the bridge of the Titanic when it was first underway, either.
The pound fell. Gold owners in the UK are not richer than they were on June 23. They merely avoided the losses incurred by their non-gold-owning countrymen. To get richer, you need to increase the amount of gold you own. If you're just watching the price go up, then you're merely witnessing the national currency go down. And with it the national savings. Even gold owners depend on savers and savings, investment, and capital accumulation. That's not possible when the currency is sinking.
We wish the best for our British friends, and hope that the damage stops here. To this we would add one thing. The regime of irredeemable paper creates many perversities. A move towards more independence and liberty can cause the pound to lose value. Why is this?
Growth in this regime consists of borrowing more. Well, Brexit calls into question if some of this debt may not be repaid. It is hard to think of any scenario in which this debt becomes more certain to be repaid, and easy to think of many scenarios in which it is called into question.
For example, there may be reduced tourism to the UK. Hotels and restaurant revenue may decline, and hence these businesses face increased difficulty in paying their debts.
Another example is the loss of EU subsidies, such as to Transport for London. While it's good that UK taxpayers may be off the hook for sending part of their productivity to Brussels, that does not necessarily help TFL service its debts unless the newly independent UK government decides to make up the loss of the EU subsidy with a UK replacement subsidy. And the same for every institution and corporation across the country which is losing its subsidy.
It's very difficult to tell real demand from artificially stimulated demand due to monetary policy and its bloody wealth effect. Well, when one central bank and the perverse policies it enables -- including subsidies not paid for by taxation -- goes away, watch out. The debt incurred to support this phony demand may default.
If enough debt seems likely to go bad, that can cause the currency itself to go down.
The price of gold has been bid up in anticipation of something, perhaps a credit crisis. Let's look at the only the only true picture of the supply and demand fundamentals for gold and silver. But first, here's the graph of the metals' prices.
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. The ratio declined a bit more this week.
The Ratio of the Gold Price to the Silver 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.
The Gold Basis and Cobasis and the Dollar Price
We switched from the August to the October contract.
The price of the dollar continued to drop (i.e. the price of gold, measured in dollars, rose). And the scarcity of gold (i.e. the cobasis, the red line) rose. So far, it's looking like a bounce off the bottom of the abyss. But it is notable that it happened with a rise in the price of the metal.
Our calculated fundamental price of gold is up a further $50 ($100 higher than on June 24). Now the fundamental is only $170 below the market price.
Now let's turn to silver.
The Silver Basis and Cobasis and the Dollar Price
In silver, the same move occurred. The price of the metal is up, and the scarcity is up a bit too.
The fundamental price is up, but still about $2.50 below the market price.
The fundamental gold to silver ratio barely budged, still just under 69.
Keith Weiner will be speaking at FreedomFest in Las Vegas this week.