COMMODITIES

Though he thinks it's too early to call a bottom in the silver price, Keith Weiner of SafeHaven.com notes that the movement on last Thursday and Friday is the sort of action traders should expect to see more of if silver is to return to a bull market.

The price of the dollar was down 50mg gold, to 27.8mg, or if you prefer 0.04g silver to 2.18g. Why do we measure the volatile dollar in terms of gold and silver? There's nothing else to measure it, certainly not the dollar-derivatives called euro, pound, franc, yen, and yuan.

In the common tongue, gold was up $20 and silver rose 25 cents.

More importantly, we want to know what happened to the fundamentals. Read on for the only proper fundamental analysis of the gold and silver markets...

But first, here's the graph of the metals' prices.

The Prices of Gold and Silver

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Click to Enlarge

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.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold:silver ratio. The ratio went sideways this week.

The Ratio of the Gold Price to the Silver Price

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Click to Enlarge

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. To read the entire article click here…

By Keith Weiner, Contributor, SafeHaven.com

Tickers Mentioned: Tickers: SLV

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