Aragorn’s Law or the Mysterious Absence of the Mad Rush

Last week the price of gold dropped $8, and that of silver 4 cents.There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.

Answer: usually when it is too late… [PT]

Consider gold. Many people know they should own it. They know that governments are profligate borrowers (even if they don’t understand the diminishing returns of borrowing, a.k.a. the marginal productivity of debt).

They know that governments haven’t got the means or intent to repay. They realize that the dollar (and euro and pound, etc.) are just slices of government debt. And they don’t want to be creditors to government.

Yet, buying gold seemingly does nothing for them. Unless its price is rising — which it clearly isn’t at the moment — what good is it? And, they ask a more pointed question.

If governments are all heading toward default, why isn’t the price of gold rising? Wouldn’t there be a mad rush for gold as government paper is repudiated? Yes, of course, when that repudiation happens. But quoth Aragorn, “today is not that day.”

Today, why should there be a gold rush? The rushers (aka the herd) want to jump on whatever asset is going up. Not so much whatever asset promises to protect them from Aragorn’s “not that day”.

Aragorn impresses the assembled valiant warriors with his today-is-not-that-day speech [PT]

Further, if some do rush in and push the price up, then a different crowd springs into action. Those who have realized a gain in their purchasing power. They sell.

Today, we must all seek to generate returns however we may. And those returns are dollars, to pay for Budweiser and the F-150 payment, or Cristal and Gulfstream 650s, as the case may be.

We know that at some point in the future, not tomorrow and not this year, but some point, the time for being a government creditor will over. Their unpayable debt will come tumbling down, and with it the currencies back by this debt.

This is what often happens at the “too late” or “almost too late” point… [PT]

But today is not that day. Today, we want to know when gold will have another run up. The price hit a high of $1365 in early April. Now it is over $140 lower. That’s no fun (even for us).

Fundamental Developments

We have documented the epic rise in the fundamental gold price (which continued to rise through the end of April) and its subequent collapse back to the longer-term trend. Look at this graph:

Theoretical fundamental gold price vs. market price (bid).

Since the price low hit around the beginning of 2016, the black line (fundamental price) shows some cyclicality. Moreover, we read it as a generally rising trend. Certainly each bottom (if indeed the most recent bottom was hit on July 19) is higher than the last (except for Dec. 2016).

Below we will provide a picture of the changing gold and silver supply and demand picture. But first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD since early March

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It fell last week.

Gold-silver ratio

Here is the gold graph showing gold the basis, the co-basis and the price of the dollar in terms of gold price.

Gold basis, co-basis and the USD priced in milligrams of gold.

The price didn’t move a lot, and neither did the basis.

The Monetary Metals Fundamental Gold Price went down $7 this week to $1,309.

Now let’s look at silver.

Silver basis, co-basis and the USD priced in grams of silver

Silver has basically the same picture.

The Monetary Metals Fundamental Silver Price fell 50 cents, to $16.72.

Charts by: Monetary Metals. Chart and image captions by PT