Where, Then, Will Silver Go? - Keith Weiner

June 13, 2016

The price of gold bumped up thirty bucks, and that of silver about one buck. Is this liftoff—when the dollar falls sharply, and the price of each metal in dollar terms skyrockets? Is this the denoument when the gold bug does not get rich, because although his net worth measured in dollar is massively up, the dollar is down in equal measure?

It’s complicated.

But we doubt it. Perhaps a labor report will come out, or news of a government doing something even more insane than irredeemable paper currency (such as giving the power to outright print currency to the legislature) will cause a rush to gold hoarding.

In the meantime, read on for the only true picture of the supply and demand fundamentals. 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 was down about two and a half points.

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

The price of the dollar is down (i.e. the price of gold is up). Along with it, the abundance of gold (blue line) is up. More gold is available at the higher price.

But not quite proportionally. Our calculated fundamental price is up $11. It’s now about ninety bucks below the market. We would never recommend to anyone to naked short a monetary metal (see the above for the kind of insanity that could cause a big spike in the price). However, we would not be buyers when gold is selling at such a premium. At least not for a trade—for those who don’t have any, we would always recommend getting some regardless of price.

Note that little changed from last week. The price blipped up, but it was primarily speculators.

Now let’s turn to silver.

The Silver Basis and Cobasis and the Dollar Price

In silver, the price of the dollar is down sharply and silver became slightly more scarce. Note that we have switched from following the July to the September contract, as July has become too volatile.

We regard the cobasis to be bouncing along at the bottom. Yes, it’s higher than it was last week, and yes, the price of silver is up sharply, and yes, the fundamental price is up from last week. It’s still about two bucks below the market.

Two bucks is a premium of almost 11.5% to its fundamental.

For now, it seems trading momentum favors silver. “And if that fails, where, then, will you go, silver?"(paraphrasing Saruman addressing Gandalf in Lord of the Rings)