The Phaserl


Curious Gold-Silver Ratio That Did Not Fall – Keith Weiner

by Keith Weiner, Sprott Money:

This holiday-shortened week (Monday was President’s Day in the US), the price of the dollar fell. In gold, it fell almost half a milligram to 24.75mg, and prices in silver it dropped 30mg, to 1.7 grams of the white monetary metal. Flipped upside down, gold went up 23 notes from the Federal Reserve, and silver appears to go up by 41 cents.

Below, we will show the only true picture of the gold and silver supply and demand fundamentals. But first, the price and ratio charts.

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. It moved sideways again this week, which would normally be odd for a time when the prices of the metals are rising.

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

For a very long time, we would post graphs that looked almost the same. Oh, the specifics of month, price, and basis would be different. But they had a certain sameness. The price of the dollar (i.e. inverse of the price of gold, in dollar terms) would move along with the cobasis (i.e. scarcity of gold). So as the dollar would rise (i.e. the price of gold would fall), the scarcity would rise. And vice versa. This means changes in price were due to changes in behavior by speculators.

And now we have a clear picture of … the opposite. The dollar has been falling since mid-December. And for that same time, the cobasis (scarcity of gold) has been rising.

Yes, gold has been getting scarcer as it becomes pricier.

How could this be possible? Doesn’t the law of supply and demand work for gold? You know, the standard “X” graph from Econ. 101?

Gold has several unique properties. One is that it is not purchased for consumption, but for monetary reserves or jewelry (which in most of the world is monetary reserves). Contrast that to copper which is purchased by plumbing manufacturers to make pipe. It’s a competitive market, and if the price of copper plumbing goes up too much then home builders will switch to plastic. Demand drops as price rises. Also, the marginal copper mine will increase production. Supply rises as price rises. It is self-correcting.

Gold, not being bought to consume, does not have a limit to demand as price rises. If anything a rising price (i.e. a falling currency) signals to people that holding gold is a good thing. They were wise to get out of their falling paper currency, and should consider buying more gold.

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