This is a brief follow up on the Supply and Demand Report of 30 November. In that report, we observed an extraordinary development in the gold market. We made several predictions, which came true almost immediately. We don’t always expect this to happen, but today we think it’s worth looking at what we said and what happened.
Regarding the gold-to silver ratio, we said this:
“[W]e will stick with our call for likely further upside in the ratio. We could see 80 or higher.”
On Sunday (Arizona time) when the market opened, the ratio briefly spiked to 80.94. (The ratio is a simple calculation. It is the price of gold divided by the price of silver. A higher ratio means gold is outperforming silver.)
Regarding the incredible backwardation in four contracts (Dec, Feb, Apr, and Jun), we said this:
“We suspect that this time, it’s a matter of price. We believe that when the price rises enough, this backwardation will subside.”
The price of gold closed at $1,167 on Friday. As I write this on Tuesday morning, it is $1,200. This is a gain of $33. The backwardation in the Feb contract has dropped by more than two thirds. It is gone entirely, in the Apr and Jun contracts.
Regarding the spikes in the cobases last week, we said this:
“Thursday was Thanksgiving, a major holiday in the US and Friday was a shortened trading day and probably had poor liquidity. So we might be somewhat inclined to take this development with a grain of salt. Only somewhat.”
In hindsight, the poor liquidity of a shortened holiday week was almost certainly a factor, in three contracts going into backwardation so suddenly. A price change of $33 isn’t all that big, and it’s hard to attribute the change in the cobases this week just to price action.
Regarding the price of gold, we said this:
“This might be a good time to go naked long gold, especially if you like to jump on the leading edge.”
The price of gold went up to $1212 by close on Monday. Assuming you did not use leverage, you made 3.9%. Or more, if you bought futures on margin.
Regarding the collapse in open interest in gold futures, we said:
“…[it] looks like it may be a major capitulation in the gold market. This doesn’t mean that there couldn’t be a bit more selling, especially when the market wakes up to the news from Switzerland.”
There was a selling frenzy on Sunday evening. The price of gold was down to $1,142 at one point.
We said the price could drop due to the “bad” Swiss news and it could go up to cure the backwardation in three contracts. Both price moves happened and the backwardation was almost entirely cured also.
Our outlook hasn’t really changed. We still expect the price of gold to move higher, and the price of silver to remain soft, if not fall a bit.