A Wild Week – Precious Metals Supply and Demand


Paying a Premium for a Lack of Default Risk

The price action got pretty intense last week! The prices of the metals were up Monday, Tuesday, and Wednesday. But Thursday and Friday, there was a sharp reversal and the silver price ended the week below its close of the previous week.

The net speculative position in gold futures has become very large recently – the market was more than ripe for a shake-out. [PT]

Silver made a round trip down from $18.35 to $18.16 by way of $19.65. That is it was +$1.35 for a moment on Wednesday, and then ended -$0.19. Gold was a bit more muted, going from $1,520 down to $1,507 by way of $1,557. It was up +$37 to close down -$7.

OK, so how do you explain this? One facile answer is “da boyz in da cartel smashed the metals down.” Aside from the government having no reason to care about the price of gold, as it has little economic impact, this idea holds no water. As we explained to Ted Butler, the evidence is against it. We won’t rehash the same old argument today.

We offer a rather more prosaic answer. Actually, two drivers.

Gold has no default risk but no yield (other than Monetary Metals investments). It is therefore the asset to own when you are more concerned with return of capital than return on capital.

This is why the price of gold has been up when the stock market has been down. Every time President Trump has tweeted a policy that will be bad for business, stocks have responded by nose-diving and the price of gold has moved up. As has the price of Treasury bonds. So Treasuries are near their all-time high, and gold is getting there too. The price of long bonds in Germany is making new highs.

In the latter half of the week, optimism, if not for the economy then at least the stocks of big corporations, has grown. By Friday’s close, US equities in the S&P 500 index were up 2.7% from Wednesday’s open.

So long as people think they can make speculative gains in equities, they don’t prefer to hold a yield-less lump of metal. And they don’t prefer silver in preference to not preferring to hold gold. In other words, silver is more speculative than gold, and therefore they sell it first.

Renewed optimism is one driver. We shall see how long that lasts. “Normally” during the boom phase, wealth-destroying enterprises like WeWork can enjoy skyrocketing valuations. Speculators aggressively demand assets, and the lowest-quality issues can go up the fastest. WeWork’s pending IPO may be in trouble.

UBER, daily – not exactly a convincing performance so far. [PT]

Fellow wealth-destroyer, Uber, went public in May and its stock has fallen about 25% since the end of July. Can they juice up another move higher in equities? Anything is possible, but the more capital is destroyed — both by speculators and by these wealth-destroying …read more

Source:: Acting Man