Where Then Will Silver Go?

By Monetary Metals

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
letter jun 12 prices, 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.

Continue reading Where Then Will Silver Go?

The Cost of Bullish Bets

By Monetary Metals

“Gold Traders Pay Most in Years to Keep Big Bullish Bet Alive”

There are two views of the markets for the monetary metals. One, as we have discussed many times in this Report, holds that gold and silver will eventually go up so high that those who own the metals will be rich. This is the Schrodinger’s dollar view. Buy gold because the dollar will soon collapse—witness China and Saudi Arabia selling dollars. And gold is going up—when it’s measured in dollars.

Believers in the surgit aurea view are always on the lookout for a new angle to support their thesis. For example, we came across this article. Apparently, silver is in such a massive shortage that a mining company, “…got approached by an electronics manufacturing company … [who] wanted to bid on our silver…”

So, a silver consumer went to a silver produce to bid (at what price?) on the silver. Therefore, silver is going to $100, and there will be “some kind of major reset”.

Our view is the other view. The prices of the metals move in a dynamic process comprising producers, hedgers, consumers, warehousemen, and speculators. In short: supply and demand.

We had the good fortune this week to find another article, pure gold vs. the soggy dollars quoted above. The headline should be crystal clear to regular readers of this Report. “Gold Traders Pay Most in Years to Keep Big Bullish Bet Alive.” The article states:

“The cost of rolling futures into a later-dated contract was recently the highest in about six years, said Bernard Sin, head of currency and metal trading at Geneva-based refiner MKS (Switzerland) SA. Those holding June futures would have paid an extra $3.40 an ounce on May 23 to swap that position for the most-active August contract…”

The last paragraph calls it by name: contango.

So what do you believe could drive the prices of the metals?

  1. Silver is going higher because consumers are talking to producers?
  2. Gold could go lower and the catalyst is speculators may be weary of spending $3.40 every two months ($20 per ounce per year)

This holiday-shortened week (Monday was Memorial Day in the US), the prices of the metals were sideways to down. Until Friday. And on that day, a labor report hit that motivated gold hoarders to stock up and silver consumers to go into an absolute frenzy of manufacturing thousands and thousands of tons of silver into products ranging from mobile phones to antimicrobial surfaces, to solar panels. Or is that what happened at 8:30am New York time?

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
letter jun 5 prices gold and silver

Continue reading The Cost of Bullish Bets

Destination Currency in the Global Carry Trade: USD?

By Michael Ashton

A “carry trade” is one in which regular returns can be earned simply on the difference in yields between different instruments

If you are an investor of the Ben Graham school, you’ve lived your life looking for “value” investments with a “margin of safety.” Periodically, if you are a pure value investor, then you go through long periods of pulling your hair out when momentum rules the day, even if you believe – as GMO’s Ben Inker eloquently stated in last month’s letter – that in the long run, no factor is as important to investment returns as valuation.

This is one of those times. Stocks have been egregiously overvalued (using the Shiller CAPE, or Tobin’s Q, or any of a dozen other traditional value metrics) for a very long time now. Ten-year Treasuries are at 1.80% in an environment where median inflation is at 2.5% and rising, and where the Fed’s target for inflation is above the long-term nominal yield. TIPS yields are significantly better, but 10-year real yields at 0.23% won’t make you rich. Commodities are very cheap, but that’s just a bubble in the other direction. The bottom line is that the last few years have not been a great time to be purely a value investor. The value investor laments “why?”, and tries to incorporate some momentum metrics into his or her approach, to at least avoid the value traps.

Well, here is one reason why: the US is the destination currency in the global carry trade.

Continue reading Destination Currency in the Global Carry Trade: USD?

Dollar’s Up Move Not Confirmed By Stocks

By Tom McCellan

Dollar’s Up Move Not Confirmed by Stocks

Dollar Index versus Russell 1000/2000 relative strength line
June 03, 2016

Some people think they know what the relationship is between the US Dollar Index and stock prices.  But as I noted in a Chart In Focus article over a year ago, the correlation between stocks and the dollar regularly flips from positive to inverse.

A more lasting relationship is shown in this week’s chart.  It compares the Dollar Index to a relative strength ratio comparing the Russell 1000 and Russell 2000 Indices.  That relative strength line moves upward when large caps are outperforming small caps on a relative basis.  And a rising relative strength line is typically associated with an uptrend for the Dollar Index.

There are exceptions, of course, times when this relationship does not work as it normally does.  We are seeing one of those exceptions right now.

Over the past 2 weeks, small caps have been leading the overall market higher, and large caps have been lagging.  That has pushed this relative strength line down.  But over that same period, the US Dollar Index has been rising instead of falling.  The two are out of step.

So which one’s right?  I could construct the argument that when the two disagree, it is usually the relative strength line which knows the real deal about where both are headed.  But that may be overly simplistic.  A better and more universal statement about their relationship is that when there is an anomaly like we are seeing now, the movement in both plots is not likely to continue moving very far.

In other words, look for the recent moves in both the Dollar Index and the relative strength line to reverse course soon.

Dollar Rally Could Impact Leaders

By Joseph Calhoun of Alhambra

The short term leadership is shifting as the dollar comes off its lows. Energy and materials had been leading the market during the recent period of dollar weakness. As the dollar found its footing over the last month, defensive sectors took the lead.

sectors 1 month 5-16

Whether this short term shift continues will likely depend on whether the Fed is right about the economy and how the market reacts to higher interest rates. What produced this pullback in materials and energy and the rally in defensive stocks was the dollar’s reaction to the recent more hawkish Fed statements. A higher dollar is now associated in the market’s mind with weaker global growth and potential troubles outside the US. Higher dollar = risk off at least for now. History says though that if the Fed is right and growth does re-accelerate in Q2 and beyond, then stocks will shrug off the short term weakness and move higher with better growth and earnings. So, is the Fed right about growth? Their track record surely doesn’t inspire much confidence but hey, blind squirrels and all that.

Continue reading Dollar Rally Could Impact Leaders

Sound as a Dollar

By Tim Knight

Back on May 3rd, I did a Slope Plus post suggesting going long the US dollar. As I phrased it at the time: “The Yen and Euro have been very strong in recent months. I believe this is about to turn, and thus I am banking on a strengthening dollar. There are plenty of ways to play this (short the Euro, short the Yen, etc.) but I’m going to use the lame-o, thinly-traded UUP.”

Well, let’s take a fresh look at the charts. Shorting the Yen has gone pretty well, and there doesn’t seem to be much in the way of support, so this probably is a good “hold”:

0524-FXY, japanese yen

The Euro has a little to go before its lower trendline, but I’ve got to say, it’s looking pretty close to being done for now.

Continue reading Sound as a Dollar

Revenge of the Fundamentals

By Monetary Metals

The price of gold moved down about twenty Federal Reserve Notes, and the price of silver dropped $0.57. The big news is that the gold-silver ratio moved up about 1.5. We hate to say “we told you so,” well, OK. Actually… sometimes there’s a certain je ne said quoi about gloating.

[biiwii comment:  we told them so too but they – certain venues out there – are not listening, Keith]


In all seriousness, the dollar is going up. We measure it in gold, or alternatively in silver. In gold, the dollar rose 0.4mg gold to 24.84. In silver, it was up 60mg to 1.88g silver. We do not think that the dollar can be measured in terms of its derivatives such as euro, pound, etc. for the many of the same reason that the gold can’t be measured in terms of its derivative, the dollar.

Why is the dollar going up? It’s the debtors that give value to a debt-based currency (not the quantity). Right now, debtors are feeling the pressure. Meanwhile, most mainstream speculators are looking at price charts and they want all-in on the dollar (most would look at this as avoiding gold exposure).

Let’s take a look at the supply and demand fundamentals. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter may 22 prices, 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 up significantly this week.

Continue reading Revenge of the Fundamentals

Gold Demand Falling

By Monetary Metals

We now calculate a fundamental on the gold-silver ratio over 81

The price of gold moved down about sixteen bucks, while that of silver dropped about three dimes. In other words, the dollar gained 0.3 milligrams of gold and 0.04 grams of silver.

We continue to read stories of the “loss of confidence in central banks.” We may not know the last detail of what that will look like—when it occurs one day. However, we will wager an ounce of fine gold against a soggy dollar bill that it will not look like today with the market bidding dollars higher.

Loss of confidence is just a meme used by gold bettors. What are they using to make their bets? Dollars. What are they trying to win? More of the dollars they say will soon go bidless.


One benefit to looking at the supply and demand fundamentals is that it tells us, more accurately than price action, what confidence in the central banks is really doing. So let’s take a look at that picture. But first, here’s the graph of the metals’ prices.

The Prices of Gold and Silver
letter may 15 prices, 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 up this week.

Continue reading Gold Demand Falling