The Bloomberg headline thunders, “Chinese Gold Standard Would Need a Rate 50 Times Bullion’s Price”! The text of the article follows up on this assertion with a price of $64,000 an ounce. Since it’s common Internet Knowledge that China is moving to a gold standard, it’s a fact that gold is going to $64,000.
Everyone should just load up on gold. Buy as much as you can get, with maximum leverage*. And just wait, you will be richer than your wildest dreams. Therefore, no one needs this Report. We are going to shut it down. Thank you to all of our readers for reading.
OK, not quite…
We see no evidence that the above extraordinary claim is true (much less the extraordinary evidence it would take). Indeed as you’ll see, market conditions in gold are not exactly moving in the direction suggested by Bloomberg, who estimated China would need to accumulate at least 10,000 tonnes of the monetary metal. It’s a pleasant fantasy, anyway.
One fact that’s at obviously odds with the $64,000 price target is the price of gold dropped $19 this week. The price of silver dropped $0.39.
Read on for a picture of supply and demand in reality… …
First, here is the graph of the metals’ prices.
The Prices of Gold and Silver
We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.
One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.
Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.
With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved up this week, though it remains almost 7 points below its fundamental value.
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 have switched from following the June contract to the August, due to the contract roll.
Well, the price of gold fell a bit but the basis (i.e. abundance) and cobasis (i.e. scarcity) ended basically unchanged. Some gold metal was sold this week. The fundamental price sagged a bit, though it’s still a few bucks above the market price. Not a good development for those speculating in the gold market.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
Silver diverged from gold. This metal became less abundant, which is what we normally expect when the price drops during the week.
Silver’s fundamental price did fall, but not as much as the price. Don’t get too excited, it’s still a buck and a quarter below the market price.
We just want to note that in the Report last week, we said that the silver price still had a lot to fall but we thought the rally might have further legs. The price did shoot up another 30 cents on Sunday (Arizona time), though it fell unceremoniously on Tuesday and couldn’t get up since.
*Don’t try this at home! It’s extremely dangerous, and can result in injury, death, or loss of all of your wealth.