EC HH Monetary Metals Brief 2016

We have consistently been making the contrarian call for a falling silver price and a rising gold to silver ratio for years. This ratio has risen a lot during this time. So are we ready to change our call yet?

Review of Our Call in 2015

Let’s hold ourselves accountable for what we said last year in our Outlook 2015: “There is currently no evidence that scarcity is rising, and thus gold should shoot da moon.” Our bottom line recommendation was, “To those looking to trade, at the moment this report is published you might buy gold for a quick trade. There is no case to buy silver.” We added, “We see no rush to load up the truck just yet.” We said the likely driver for a higher price would be deteriorating credit conditions.

How did we do with these calls?

The gold price has not yet risen to meet our fundamental price. The price was basically down all year after a blip in January. Our silver call turned out to be conservative. Silver closed the year at $13.84, which was below even our number.

Our call on the gold-silver ratio was in the right direction, though the market did not move a lot. It went up about 1.6%.

How Not to Think about Gold

There are several popular approaches to analyzing gold but the most popular is the conventional commodity analysis of annual supply and demand figures. However, gold cannot be understood by looking at small changes in production or consumption.

This is because virtually all of the gold ever mined in human history is still in human hands (to a somewhat lesser extent for silver). No other commodity comes even remotely close. The US Geological Survey estimated the total gold stocks at 171,300 metric tons at the end of 2011. Annual production is just 1.6% of these stocks. In other words, it would take 61 years at current production levels just to produce the same amount of gold as is now stockpiled. In regular commodities, this same ratio—stocks to flows—is measured in months. We just don’t hoard wheat and oil for the long term, for obvious reasons. Nor even iron or lumber or other durable materials.