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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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Soft and Softer Silver Fundamentals

Last week, we asked where then will silver go. Well, the price moved around this week, dipping on Thursday but then rebounding sharply on Friday. It closed up 13 cents from last week. The price of gold rose $24.

This week, the Federal Reserve announced that it will not hike rates. Most economists (and traders) have long been expecting a hike (not us). A hike is tighter monetary policy, and therefore not-hiking is looser. Which means a greater quantity of dollars. Which means higher prices. Everyone knows that (except us).

So naturally, on the announcement, the price of silver blipped up about 20 cents. It continued to drift another 25 cents higher. And then cascaded down almost 65 cents. Almost no one knows that prices, including the prices of the metals, have anything to do with the quantity of dollars (except us). Then the price began drifting higher, had another sharp drop, and drifted back up again. Though it ended the week quite a bit lower than the post-Fed high of $14.85.

Folks, we have to say it. This is all noise. Not the non-hike. That is serious economics that is undermining capital, crushing business profit margins, driving asset bubbles, and ruining pension funds and banks. The Great Fed Falling Interest Rate since 1981 continues.

The price moves on these events. Over the long term, only buyers and sellers of real metal can set the price. In the short term, leveraged speculators can place big bets and thereby push or pull the price down or up from where it would otherwise be.

Let's take a look at those buyers and sellers of real metal, in the only true picture of 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 up a bit this week, interesting when the prices of both metals are up.

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

Look at that red cobasis line (i.e. scarcity of gold). It is dropping along with the price of the dollar (inverse to the price of gold, measured in dollars). In other worse, gold becomes less scarce and more abundant the higher its price. Huh, that's not what some gold promoters are saying, is it?

Our calculated fundamental price is down almost $40, more than $140 below the market price.

Now let's turn to silver.

The Silver Basis and Cobasis and the Dollar Price

Silver Basis and Cobasis and the Dollar Price

It's a similar picture in silver. Note that the cobasis is at a (much) lower absolute level in silver, compared to gold (-1.7% vs. -1.2%).

The fundamental price fell over 30 cents, now $2.40 below market.

 

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