Precious Metals Supply and Demand Report

The price of gold dropped $24, and that of silver 60 cents this week. This is a far cry from Sep 8, when the price of silver hit $18.21. Since then, it’s been almost all downhill. What happened? Since the beginning of last month, the price of silver had been rising and at the basis along with it.

Spot silver, daily. The rally was quite sizable, but at the peak a divergence with the gold price emerged (gold exceeded its April high, while silver failed to do so). That is not always meaningful, but it is always a “heads-up”, particularly when prices have already trended for a while. Silver obviously remains stuck in a medium term trading range for now. The longer this continues, the more meaningful an eventual breakout in prices will be. [PT] – click to enlarge.

The basis is the price of the futures contract minus the spot price. A rising price and basis is telling us that buyers are pushing up the price — of futures. By arbitrage, the price of the metal is pulled up too, but it trails.

Another way to describe this is to say that the marginal buyer of silver metal is the market maker, who warehouses it for the futures buyer. If this is the marginal demand, then it’s a bearish indicator because it could disappear and become the marginal supply.

That is what has happened for the last two weeks. The closing price peaked on Sep 7, and has been dropping since then. Along with it, the basis has been falling. Both the August through Sep 7 trend of rising price and basis, and the Sep 8 through present trend of falling price and basis show us something clearly that cannot be seen on other graphs. These moves are caused by speculators positioning themselves and then closing their positions again.

Two facts in this round trip are unfortunate for silver speculators. One, when the price was rising, the basis was rising. Real demand dropped off while speculative demand is only temporary. Two, when the price came back down the basis did not fall that much. The fundamental silver price that we calculate daily began falling after 8 September.

One might wish for the price to skyrocket, but one must respect the data. The data does not guarantee that the price could not hit $20 or perhaps even $22. But it shows that there is no reason for it to do so, and the more the price rises, the stronger are the forces pulling it back down.

We are not in the same short-term interest rate environment that existed during most of the last 9 years. This is reflected in the cost of carry for all trades. In the case of silver, the silver forward rate shows that the offered rate (what a trader would pay to carry silver for 6 months) was around 0.5% at the end of 2015, but has since gone up to about 2%.

We assume …read more

Source:: Acting Man

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