For quite a while, we have been talking about scarcity in gold. The cobasis for both October and December is positive. These contracts are backwardated. The cobasis for the February 2016 contract is not far from backwardation. The gold market is tight. Why? Let’s explore.

Part of the matter is that the price has fallen. The more the price drops, the more buyers tend to come out, and sellers go away.

We do not refer necessarily to the mines. Once the capital is sunk, a mining company is a price-taker. Management has little choice but to extract what it can, and hope the quantity produced times the profit available at a given gold price is enough to pay the fixed expenses such as debt service (well, if they don’t have a proper hedging program, which I wrote about here and here). Gold is often produced as a byproduct when mining for other metals, and this production depends on the profitability of the main metal in the ore.

For thousands of years, the market has absorbed all the output from every mine. If the quantity theory of money were true, gold would be a worthless commodity. Unlike everything else (except silver), the stocks of gold held by the people are a large multiple of annual production. There is no such thing as a glut in gold.

The lower price is not the only factor. The price of silver has fallen more than the price of gold. However, while there is backwardation in the September silver contract, there’s nothing even close in December much less 2016.

We constantly emphasize that gold does not go up or down. It’s the dollar that goes down or up, respectively. It’s mostly down, from over 1500mg gold in 1913 to just under 28mg today. This is an epic fall of more than 98% (though it’s up from around 16.5mg in 2011).

If it is controversial to say that gold doesn’t move, it’s even more so to say that the cause of the dollar’s decline is not its increasing quantity. The cause is its decreasing quality. In just the last 44 years since President Nixon’s gold default, the dollar fell from about 780mg. It is no coincidence that this dramatic drop occurred while the dollar went through several upheavals. The dollar was a gold redeemable currency, and then it was just a slice of the US government’s debt. Then the government spent more and more on less and less. After 2008, the dollar is partially a slice of mortgage debt, of unknown provenance.

It bloody well should be worth less! It represents less, claims less capital, and its likely repayment is dropping like a lead balloon.

That only leaves the question of why it has been rising for four years.

We think it boils down to confidence. Virtually everyone, from the blind faithful followers of the Fed, to its harshest critics, accept that the dollar is money. In other words, they are confident in the greatest confidence scheme ever.