This is Your Brain on Dollars
We can’t count how many articles we saw last week, bemoaning gold going down. The price action is bad for gold (whatever that means). China underreported their gold holdings. No, China doesn’t care about gold. No, they want the price to go down so they can buy it cheap. No, they want to convince the IMF to include the yuan (which has capital controls, by the way) into the SDR basket. No, China really intends to revalue gold (whatever that means).
A dollar thinker buys gold for one reason: To sell it. Either he sells it when the price goes up, and he gets more dollars than he paid. Or else he sells it for less, and takes a loss.
But sell it, he must. Sell it, he plans. And his sole concern is the price of gold.
We would suggest that you, dear reader, think in gold terms. The dollar distorts prices, balance sheets, business plans—and thinking. Here is a graph showing the gold view of the dollar.
The dollar is going up. This is good for everyone with a bank account, a business, a pension, annuity, and/or insurance. Or a job. It’s bad if you have made a leveraged bet to short the dollar using gold (e.g. buying gold futures on margin).
We suggest that you ought to be concerned with the scarcity of gold. Is gold coming onto the market as the price drops? Or is it disappearing into a growing shortage?
Even dollar thinkers can appreciate that if gold is becoming scarcer as its price falls, then the price will turn around. Probably abruptly. On the other hand, if the metal remains abundant, or becomes more so in light of a price drop, then the price could keep falling.
So what is it? What happened over the course of this long price drop?
Here is a graph showing the gold price. We have overlaid our gold scarcity measure, the cobasis, in red.
Some of the rise is due to the phenomenon of temporary backwardation. As we near First Notice Day of the August contract (at the end of the month), the cobasis tends to rise. However, there is also a proportional rise in the October contract (which has been in backwardation since Wednesday two weeks back, when the price was $1149).
Keith Weiner is CEO of Monetary Metals, a precious metals fund company in Scottsdale, Arizona. He 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. He is founder of DiamondWare, a software company sold to Nortel in 2008, and founder of the Gold Standard Institute USA. Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the (non-accredited) New Austrian School of Economics.