What’s the Point – Keith Weiner

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by Keith Weiner, Sprott Money:

A reader emailed us, to ask a few pointed questions.

Paraphrasing, they are:

1. Who cares if dollars are calculated in gold or gold is calculated in dollars? People care only if their purchasing power has grown.

2. What is the basis good for? Is it just mathematical play for gold theorists? How does knowing the basis help your readers? Is it just a theoretical explanation of what has already happened?

3. Prove that if someone has known the basis for the last four years, he has benefitted.

He also added:

“Most websites on gold I’ve seen I have no respect for. They are snake oil salesmen trying to sell gold. Yours is not. So in that sense you guys are honest.”

That number, again, is 1-800-GOT-GOLD!

Just kidding. Thank you, sir, for your kind words and now let’s address your questions.

First, we have a general response. It is good to know the truth, for its own sake, even if there is no immediate or obvious practical benefit. The world works a certain way and, speaking for ourselves, we want to know what that way is. As they say, knowledge is power. This is doubly so with gold, where there is so much misinformation, disinformation, and rubbish economics. Some of it is mainstream, such as quantity theory of money. Some of it is unique to the gold market, such as allegations of manipulation.

Perhaps this particular set of truths about the gold market is of interest only to gold theorists. We are gold theorists, so it is of interest to us. Gold theorists number among our readers, too. But we argue that this particular set of truths should be of interest to everyone.

The greatest danger of our era is the coming monetary collapse. It is the inevitable consequence of irredeemable currency, exponentially rising debt, and falling interest. Many know that gold is part of the solution, but how? Is it just something one buys, as a speculation, to sell when its price rises?

We believe that gold is much more than that. And we argue that the belief that one must speculate to increase purchasing power is an inevitable consequence of the Fed’s war on interest. Deprived of the ability to get a reasonable yield, people turn to speculation as a surrogate.

The economic effects of investing for yield are opposite to those of speculating for capital gains. In the former, you finance an increase in production and your return comes from some of that increase. In the latter, you give your capital to a previous speculator who is exiting, and your gain comes from the next speculator handing his capital to you. Speculation converts someone’s wealth into someone else’s income, to be spent. It is a process of eating the seed corn, as Keith discusses in his series on Yield Purchasing Power .

This is one reason why we insist that gold is money, and one must calculate the value of the dollar in gold terms (i.e. 24.3 milligrams) rather than the value of gold in dollars (i.e. $1,280). The lighthouse does not move higher and lower, the steel meter stick does not get longer and shorter, and gold does not go up and down. It’s the sinking boat in the storm, the rubber band, and the dollar which move.

Another is that only with this understanding can one grasp other phenomena. For example, the sputtering and slow withdrawal of the gold bid on the dollar. In all markets in all places and times, there is a principle that the bid can withdraw in times of stress or crisis. It is never the offer that withdraws, but the bid. For example, Keith often asks what if the US Geological Survey said there will soon be an earthquake in Los Angeles, 15 on the Richter Scale? There will be many offers to sell real estate in LA. But no bid, probably from Santiago, Chile to Vancouver British Columbia, and as far east as the Mississippi River.

If one thinks that the dollar is money, and gold is a commodity, how to explain backwardation? Is it the one exception, where the offer to sell something is withdrawn while the bid is robust? What is one to make of gold backwardation (when cobasis > 0)?

Only with a clear picture, i.e. that gold is money and the dollar is credit paper, can one see that gold backwardation is serious business. It is an early harbinger of the end of our monetary era. By this, we do not mean: there will be a recession, stock market correction, or inflation (rising consumer prices). When the capital of an enterprise has been siphoned off over a period of decades, and debt is racked up beyond all means or intent to repay, and finally the inevitable default on the bond occurs, the price of that bond can go to zero.

This is not a price of gold of infinity, but a price of the dollar of zero.

But, to paraphrase our old friend Aragorn, today is not that day! In the meantime, the dollar is strong. And it has been getting stronger since early September (when it was 23.1mg gold).

On to the practical reasons to follow the gold basis and Monetary Metals research. As our reader noted, we often show what happened. We see two benefits to this. One, if you know that a bunch of speculators jumped on a Fed announcement with leverage, you know not to pile in after the gold price has blipped up $20. You know it’s not likely a durable move. Two, you may even fade the move.

The Monetary Metals Supply and Demand Report is not a trading letter. At the core, it shows a picture of, well, supply and demand conditions in the gold and silver markets. Occasionally, we will note that a metal seems underpriced or alternatively, we may say caveat emptor. On our site, we publish graphs of our calculated premium or discount on gold and silver.

While we do not say “buy here” and “sell there”, we provide a unique data set and view, not available anywhere else, to help inform traders. The basis provides actionable trading information, even if we don’t spell it out, and we use it to trade our Gold Exponential Fund .

Can we prove that readers have benefited over the past 4 years? No, and yes. No, because we don’t call trades. So we cannot tabulate simple results. But yes, because we preserve everything we have written going back to the launch of our website in January 2013. Between public and premium (free, but requires an email address) Supply and Demand Reports, you can go back to see what we were saying when we said it. For example, in July 2016 the price of silver seemed to be on a tear. It went from around $14 at the beginning of the year, to over $20.

What did your favorite silver analyst say at the time? We said many things along the way, but let’s bracket the move.

At the start, on January 31, 2016, we titled our Report Possible Sign of Silver Turn . We said:

“It’s far too early to call a bottom in the silver price. However, the movement on Thu and Fri is the sort of action we should expect to see more of if silver is to return to a bull market. It will take more action like this before we change our position on the white metal, but it is worth reporting on what we see when we see it.”

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