Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment
The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 - it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.
After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the US dollar. In fact, this was a resistance level in 2014 - 2015, which was first overcome in early August 2015, when the yuan weakened sharply. If we are not misinterpreting something, Beijing has hinted in veiled terms at possibly deploying its fairly tight control over the non-convertible currency's exchange rate as a weapon in the ongoing trade dispute with the US. If so, the yuan may well weaken after its one-year long bout of strength. We get the thought process behind the quasi gold convertibility thesis, but we are not quite sure how it would work in practice (i.e., would one actually be able to move physical gold out of China willy-nilly if it were delivered against a yuan-denominated futures contract held by a foreigner? We have not really seen a detailed explanation of the mechanics of this type of transaction, but that may well be our fault for not making enough of an effort to search it out) [PT]
It has been possible to do in New York, so they obviously were not desperate to do this trade. The price of gold has fallen a bit since March 26 as well.
In the holiday-shortened week, the price of gold rose $8 and the price of silver went up 4 cents. However, something has been happening to the fundamentals of one of them. We will take a look at that.
But first, here is the chart of the prices of gold and silver.
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). The ratio rose slightly.
Gold-silver ratio, bid and offer.
Here is the gold graph showing gold basis, 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
We have another instance where the dollar is falling (inverse of the rising price of gold, measured in dollars) while gold becomes scarcer at the higher price (i.e. the co-basis, the red line).
Unsurprisingly, the Monetary Metals Gold Fundamental Price rose $44 this week, to $1,493. This is above the end-of-year target we published in our Outlook 2018.
Now let's look at silver.
Silver basis, co-basis and the USD priced in grams of silver
The May contract is nearing expiry, and as is typical in silver there is a falling basis and rising co-basis due to the contract roll aside from any changes in abundance or scarcity.
That said, the silver co-basis fell slightly from March 29. The Monetary Metals Silver Fundamental Price fell 14 cents to $17.10.
Here are graphs of the gold and silver fundamental prices. There is a noticeable uptrend in gold, but not in silver.
Fundamental vs. market price of gold - the uptrend in the fundamental price suggests physical demand is stronger than futures markets have acknowledged so far. [PT]
The fundamental price of silver is also well above the market price at present, but does not show a similar uptrend (note that silver usually lags gold when economic confidence is weakening. Over the past year or longer, the high (and rising) gold-silver ratio has been a rather odd outlier accompanying the economic expansion, particularly as it coincided with extremely tight rather than widening credit spreads most of the time. Perhaps this constitutes a subtle economic warning sign, or it is another hint that credit spreads have become distorted by central bank intervention (particularly by the ECB). [PT]
(C) 2018 Monetary Metals
Charts by: Bigcharts, Monetary Metals
Chart and image captions by PT
Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.