"No warning can save people determined to grow suddently rich" - Lord Overstone

  • 10 hours Millennials Are Waiting For A $30T Inheritance That Might Not Come
  • 11 hours Is This the Tipping Point for American Credit Card Debt?
  • 12 hours Tech Icon Predicts A Big Future For Ethereum
  • 13 hours Apple Doubles Down On Data Privacy
  • 14 hours Where To Look As The Treasury Bond Bull Run Loses Steam
  • 15 hours The Tech Giants Poised For A Breakout
  • 17 hours The U.S. Dollar Is Set To Continue Its Rally
  • 18 hours Bitcoin Plummets On Price Manipulation Investigation
  • 1 day The Multi-Billion-Dollar Business Of Influence Peddling
  • 1 day Goldman Backed ‘Stablecoin’ Hopes To Curb Crypto Volatility
  • 2 days Consumers Lost $1.6M To Crypto Fraud In Australia
  • 2 days Facebook May Soon Become A Paid Service
  • 2 days How Far Can Gold Prices Fall?
  • 2 days The Battle For Shkreli's $2 Million Wu-Tang Record
  • 2 days The Bitcoin Miner Eyeing A $1 Billion IPO
  • 2 days China’s Social Credit Score Blacklists Travelers For Bad Behavior
  • 2 days Micron Soars On $10-Billion Share Buyback
  • 3 days Nearly Half Of All Americans Are Struggling Financially
  • 3 days Could Crypto Solve The Middle East’s Currency Crisis?
  • 3 days The Biggest Hurdle For The Buffett-Bezos Healthcare Plan
The Tech Giants Poised For A Breakout

The Tech Giants Poised For A Breakout

Bullish sentiment seems to have…

PayPal’s Latest Acquisition Has Competitors On Edge

PayPal’s Latest Acquisition Has Competitors On Edge

PayPal’s latest acquisition allows the…

The Five Most Important Market Indicators

The Five Most Important Market Indicators

Stock markets can be overwhelming…

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…

More Info

The Great Silver Bubble

The price of gold was down about fifteen Federal Reserve Notes this week. The price of silver was down sixty-two copper-plated zinc pennies. Is the Federal Reserve Note a suitable instrument with which to measure gold? Can one really use debased pennies—which aren't even made of the base metal copper any more—to measure the value of gold? We don't know. We just work here. Quick, buy some silver, we hear it's going to $100!

Not so fast. As the headline suggests, we think silver has been bid into a speculative bubble. We'll cover that and show a new graph to support our discussion.

Read on for 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

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 rose 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

A little move down in the FRN-price of gold, i.e. a ¼ milligram move up in the price of the dollar as measured in gold… and we see larger moves in the basis and cobasis. The abundance of gold fell, and its scarcity increased.

The market price may have dropped, but our calculated fundamental price bumped up. It's still below the market price, but not all that much.

Silver is another story, so let's turn to silver.

The Silver Basis and Cobasis and the Dollar Price

Silver Basis and Cobasis and the Dollar Price

Note: we switched from the September contract to December as September is too close to expiry to be usable as a signal now.

The price of silver fell more than gold in proportion, but we do not see anything like the move in its bases. Unsurprisingly, the fundamental price of silver fell. It's way, way under the market price.

Consider the following graph.

The Great Silver Bubble

The Great Silver Bubble

This is a picture of the price of silver, along with the basis, premium (the market price – our fundamental price, shown as a percentage), and open interest in the futures market. As we have written in the past, open interest tends to rise as the basis rises, because a higher basis is a greater incentive to carry silver. To carry metal, you simultaneously buy a bar and sell a contract. You are not betting on price, but earning a small spread—the basis spread.

The basis and our calculated premium bottomed and began their current rise around late November. The price of silver began moving up a bit later, around mid-January. And open interest bottomed in late January (it is subject to other factors, such as bank credit availability). Since then, a great bubble has been inflating, with a small leak in May.

The correlation of these four numbers—price, basis, premium, and futures open interest—is not perfect, but it's uncannily close.

Who knows when the air will be let out of it? All we can say is that Friday's 61-cent price action is likely a small down payment on a $3 move south.

 

Back to homepage

Leave a comment

Leave a comment