Precious metals in light of the US repo mess

Precious metals in light of the US repo mess

30 September 2019 from Mikael Syding

Since the financial crisis in 2008, the world’s central banks have printed hundreds of thousands of billions SEK (tens of USD trillions). This means that a new era in finance started after Lehman’s bankruptcy. An era of free money and moral hazard. An era where market forces are out of play and where debt does not matter. Seen in another way though, the new era is only a logical consequence of both the Fed’s creation in 1913 and the US abolition of the gold standard in 1971.

IThis year, more and more signs of problems in the financial sector have emerged. For example, the amount of negative yielding bonds had exploded upwards to more than USD 17.000 billion, and the Fed Fund rate has risen above the IOER rate. The latter can signal on the surface that the banks are at lower risk than the central bank that controls them. Of course, this can never happen. The central bank that controls the dollar is risk-free because it is able to create how much money it wants and the banks under it are not. This means that the spread says something different and it is unclear what exactly, but it is hardly anything positive.

Two weeks ago, the most negative signal in ten years was emitted from the US repo market. The central bank was forced to already carry out several transactions in mid-September (rather than the end), because overnight rates on September 17 quickly rose from 2 per cent to 10 per cent. In practice, that meant a return to quantitative easing, but in secret, without publicly announcing that this is what they did. In three steps, the outstanding repos were increased to USD 105 billion from about USD 20 billion normally, i.e. the FED added an additional USD 85 billion in liquidity to the banking system to prevent any bank from receiving an acute shortage of cash at the end of the quarter. The fact that the problems began several weeks before the end of the month indicates that the problems were extra serious. And the failure to fix the problem with the first repo, with which the FED obviously wanted to signal that everything was under control, underlines the seriousness.

When financial markets are in turmoil, especially the money market, it is reasonable for investors to seek protection in hard currencies, real assets. When central banks print money in panic, not least when they suddenly change from hawkish to dovish, precious metals become attractive, and perhaps cryptocurrencies to a certain extent. Indeed, in completely wrecked economies like Zimbabwe, Venezuela and Argentina, Bitcoin can be more attractive than gold because it is easier to hide and transfer, while also allowing direct personal control over one’s assets. However, in more developed countries, the security of a concrete and durable lump of metal may be a better alternative as a place to park your money.
Oddly enough, Bitcoin has instead fallen quickly by 20%, while gold shows some weaknesses as well.

The latter may still be natural after the rapid increase in prices since May. The somewhat unexpected development could be due to the fact that gold and Bitcoin are both leveraged financial assets. When things get negative in the markets, leveraged financial assets also go down in the beginning when weak hands sell out. The weakness in the oil market also indicates future financial problems, so it may be possible that interest rates, crypto, oil and gold together signal negative times ahead – negative enough that even real assets fall in price. An alternative interpretation is that the problems are limited to the US banks and thus are not serious enough to matter for precious metals prices. For example: the LIBOR interest rate fell as it would in accordance with the Fed's September 18 interest rate cut.

With all of the above in mind, palladium clearly looks positive in the graph, unlike platinum, which seems to have a hard time rising in price. However, perhaps it is a good opportunity to trade the spread between palladium and platinum, with prices approaching each other again, since the metals are frequently used in the same applications. The third white precious metal, silver, confirmed and met an extremely positive development, and is still low valued in relation to gold, but may still find it difficult to move up more in the short term unless gold gains momentum again. The gold graph looks extremely positive in the coming year, and if you dare say like Ray Dalio, the coming decade. For the coming few weeks', however, it is likely that gold will continue sideways. However, do not forget that the central banks are buying gold with both hands, and the fiat system looks vulnerable, so it could be dangerous to hope to buy gold at a bargain only a few percent cheaper, while risk foregoing +100% upside in gold.






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21/01/2022 13:02:16


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