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The Great Silver Bubble - Keith Weiner

The Great Silver Bubble - Keith Weiner
By Keith Weiner 2 years ago 1969 Views 1 comment

August 8, 2016

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

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

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

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

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

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.



Keith Weiner is CEO of Monetary Metals, a precious metals fund company in Scottsdale, Arizona. He is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare, a software company sold to Nortel in 2008, and he currently serves as president of the Gold Standard Institute USA.

Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the New Austrian School of Economics. He blogs about gold and the dollar, and his articles appear on Zero Hedge, Kitco, and other leading sites. As a leading authority and advocate for rational monetary policy, he has appeared on financial television, The Peter Schiff Show and as a speaker at FreedomFest. He lives with his wife near Phoenix, Arizona.


The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

Jonathan 2 years ago at 7:55 AM
Mr. Weiner, my questions to you....

1.) Did you recently make or increase your short position in Ag/Au?

2.) Do you plan to include the extreme/historic "naked" short buildup in both Au/Ag for your discussion.

3.) Have you recently looked at the price of Au in other currencies?

4.) Can you tell me the import numbers of Ag into China/India?

5.) What is the 2016 projected mine output for both Au/Ag? What was the FY2015 supply/demand?

6.) Have you by chance made any gains thus far in either Au/Ag, or are you still hold onto those USD's?

7.) US Debt/Bond/Stock prices, I mean really, have you noticed any of THESE BUBBLES???? Do you care to talk about them while you "claim" a bubble in silver is present?

To be an "accurate" analyst, one must research "ALL" market information before simply using a "co-basis/basis" strategy against ONLY the USD. You must take into consideration fundamentals, technicals, manipulations (COMEX historic naked shorts ring a bell???) and lastly the USD.

Therefore, an article as you've written here, simply irritates me to the core, unless you can give me detailed answers to all my above questions with sources, might I then consider your strategy.....but hey, I just live here.

Thanks,

Jonathan K
BitcoinCash

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