Get 40% Off
🚨 Volatile Markets? Find Hidden Gems for Serious Outperformance
Find Stocks Now

Last Week's Silver Spike: What It Really Means For Markets

Published 07/04/2016, 02:52 AM
Updated 07/09/2023, 06:31 AM

On Wednesday through Friday, the price of silver spiked massively. It ended the week about $2 higher than the previous week. The last time we recall silver price action like this was about 3 years ago, in August 2013. That one week, the price rose about $2.50. Before that was a week in August 2012, with a price gain of about $2.70. Previously, January 2012, +$2.50. Earlier was October 2011, +$4. The biggest was in April 2011, +$4.20.

Looking beyond this week, the whole of year 2016 looks like a parabola to us.

Silver Price YTD

The price of gold moved up, but it was not unusual at all. +$26.

Especially in the context of the British referendum to leave the EU, it is easy to project onto others one’s own distrust of profligate governments, massive public debts, an opaque banking system, and central banks who are desperately and visibly trying to debase their currencies.

However, we would suggest taking a step back and looking at this more calmly. The price moved up. If we set aside the natural tendency towards recency bias, this price move is not so exceptional. Indeed, we have several examples of moves this large or greater. None of those presaged the End of the Monetary World as We Know It. Actually, they presaged further price declines.

We have seen headlines on Friday about the “gold wagon to $10,000”, “$360 silver”, and other hyperbolic assertions. It’s never good for your wealth to go into the casino to place your bets based on this kind of information.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Let’s look at the only the only true picture of the supply and demand fundamentals for silver, and of course gold too. But first, here’s the graph of the metals’ prices.

Gold:Silver Price

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio had a mini-collapse this week.

Gold:Silver Ratio

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:

Gold Basis and Cobasis vs USD

Look at that. The price of the dollar dropped (i.e. the price of gold, measured in dollars, rose) almost half a milligram. At the same time, the abundance of gold (i.e. the basis, the blue line) fell from 1.4% to 1.1%. 1.1% is still a high yield for a two month carry trade. But it’s less than it was.

Other months did not move so greatly. What could cause the basis of the near month to fall as it nears First Notice Day, the deadline for speculators without the cash to stand for delivery to exit the contract? These speculators, every one of them, must sell. There is downward pressure on the August gold contract, and upward pressure on the October gold contract.

It’s no surprise that our calculated fundamental price of gold is up. But not that much. $50. The market price is up $26, so it’s still far above the fundamentals. But this week, about $205.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Now let’s turn to silver.

Silver Basis and Cobasis vs USD

In silver, as the price of the dollar rose / dollar price of silver, the abundance rose.

The fundamental price is up, about $1.35. However, the market price gained about $2, increasing the fundamental-market spread another 65 cents, to just under $3.

Latest comments

Traders getting ready to fight the werewolves
am I missing something? . I could not find an answer in the article to the Headline of "What It Really Means For Markets" .. ???. Thank you..
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.