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Keith Weiner

Keith Weiner

Keith is founder of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of precious metals fund manager Monetary Metals. He created DiamondWare, a…

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Gold and Silver Aren't Getting Stronger

The dollar moved up, though most people would say gold fell about $40, and silver 32 cents. In the mainstream view, the value of the dollar is 1/N (N is the quantity). So how could the dollar go up? Certainly, the quantity keeps on increasing.

Our view is different. If you borrow dollars to buy an asset, and the asset doesn't produce generate enough yield to pay the interest, you have to sell or default. It should go without saying that it's an unsustainable Ponzi scheme if everyone keeps borrowing more and more to simply bid up the price of any asset (including gold).

So here we are, and the dollar is getting more valuable again.

Let's take a look at the supply and demand fundamentals. But first, here's the graph of the metals' prices.

The Prices of Gold and Silver

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 was down a bit this week.

The Ratio of the Gold Price to the Silver Price

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

Gold Basis and Cobasis and the Dollar Price

The red line is back to a tight correlation with the green. That is, the price of the dollar is rising (i.e. the price of gold, measured in dollars is falling). Along with it, we finally see a noticeable rise in the scarcity of gold. Gold finally got a bit scarcer as its price fell another $40. Speculators finally flushed a bit, with stop orders getting hit in this brutal (to them) price action. Regular readers of Monetary Metals didn't get caught, as we have been saying that the fundamental price of gold is below the market.

Our calculated fundamental price of gold is just under $1,170. Sure, gold got scarcer with the price drop. But only in proportion.

Now let's turn to silver.

The Silver Basis and Cobasis and the Dollar Price

Silver Basis and Cobasis and the Dollar Price

The same pattern applies in silver.

As in gold, silver is scarcer at this lower price. Proportionally.

The fundamental is $13.90. This gives us a fundamental gold-silver ratio of about 84.

 

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