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What Made Gold Go Up - Keith Weiner (20/10/2017)

What Made Gold Go Up - Keith Weiner (20/10/2017)
By Keith Weiner 3 months ago 5608 Views No comments

October 20, 2017

Yesterday, the Department of Labor announced that initial jobless claims dropped. Quite a lot. So naturally, markets reacted. The stock market began to rise. The euro rose, at least for a while.

And the prices of our favorite heavy metals rose, particularly silver. Silver was around its low of $16.92 before the report. Two and a half hours later, it was $17.26. Our first reaction was to ask, “really?? Unemployment causes silver buying?”

OK, sure, we suppose if everyone is maximally employed, they will buy more jewelry, electronics, solar panels, and all of the consumer products that contain silver. Or, perhaps they will buy silver coins and stack them.

However, a 2 percent increase in just over 2 hours seems overdone. So we turned to the data to take a look. We have described the basis theory many times. Today, let’s just say it simply. If speculators are buying, they want leverage and they tend to use futures. If there is real demand for real silver, these businesses and stackers buy real metal.

These are two different markets, with two different prices.

So we want to look to see the change in the futures price, not relative to where it was but relative to the spot price. We know how much it changed over 150 minutes: 34 cents. We want to look at how much it changed relative to the price of real metal.

This difference between future price and metal price is called the basis. If the basis increased, it means that the price action was driven in the futures market. If a speculator bids up the price of a silver futures contract, then the basis goes up.

A market maker will pull up the price of spot silver—you will not see the price of the futures just divorce itself from spot. But spot is pulled up reluctantly, dragging behind.

Our data platform has the resolution to show these moves in high resolution.

Here is the intraday graph, showing the gold price and gold basis (December contract) before, during, and after the move.

The move in gold was about $6. Yet we can clearly see there is a pretty good correlation between basis and price. The conclusion: speculators saw the news item, decided gold should go up, and made it happen. They front-run what they theorize ought to happen. But the fundamental demand is not there. Perhaps one of these days, they will be right and demand for metal will increase sharply after the speculators buy in. But we suspect that today is not that day.

Although, note that the basis shows a rise at the very start of the graph, and goes high until after 10am (GMT) when the correlation with price clicks into place. We place less weight on the drop in basis at the end. That is at the end of the trading day, and sometimes spreads do funny things at times like that.

The percentage move in silver was about four times bigger.


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.

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