It is exceedingly easy to follow everyone else and assume that gold prices are reacting to some ephemeral change in convoluted perceptions of attitudes for expectations toward a monetary stance, but since the beginning of the year gold has been captured as a means to foster interbank liquidity. Gold prices rise when the physical shortage asserts itself, because it is [...]
Yesterday the Fed conducted the first test of its newly-minted Fixed-Rate Reverse Repo program. The auction drew $11.809 billion in bids (all accepted, thus the “fixed rate” rather than “fixed allotment”) at 0.01%. Since this is a reverse repo, the Fed is “borrowing” cash from the system, collateralized by the UST’s in its SOMA holdings. Most commentary continues to focus [...]
The sudden upturn in GOFO led me to believe that there were changes in the gold dynamics from the relatively favorable period through mid-August. Given the repo action around the UST auctions this week and last, there can be little doubt the collateral shortage has been renewed. Starting August 27, several tenors of UST bonds went special in repo markets, [...]
Back in April, there had been, as I posted yesterday, a change in funding conditions for dollar markets. It was, by most accounts, imperceptible except for the strange secondary collateral and liquidity indications that began to appear with more frequency. Sitting in the intersection between liquidity, monetary policy and the real estate re-bubble, Wellington Denahan, CEO of Annaly Capital, the [...]
Repo markets are flashing warnings again, as conventional explanations fall short of full comprehensiveness. We learned today that US treasuries across the curve are once again trading very special in the repo market, meaning negative repo rates for US notes from 2 to 10 years in maturity. Technical factors play a role, as this week’s auctions will change over the [...]
There still hasn’t been any official acknowledgement that QE damages effective liquidity by removing usable collateral from the system. By purchasing US Treasury debt securities, including those just auctioned, the Federal Reserve is reducing what is left for the market to repo and, more importantly for fragmented markets, rehypothecate. The closest we have to facing up to the problem is [...]
Gold forward rates continue to demonstrate severe gold strains. While GOFO across several maturities has risen slightly in the past few trading days, it remains negative out to 3-months. It is important to remember both what GOFO is and what it is telling us. To the former, GOFO is not a market indication; it is a “fix”, or a survey [...]
Following up on the repo warning from two weeks ago, we have gotten confirmation in the form of repo fails. In the US treasury repo market, the primary liquidity conduit in the US dollar wholesale money, we have been seeing indications of dramatic shortages in available collateral for some time. It was first noted back in March in the week [...]
Earlier in the week I outlined the relationship between gold and collateralized liquidity in the banking system. In a second post, I put together the pieces of what may currently be driving growing illiquidity, with particularly emphasis on Europe. This post intends on adding detail and evidence to this cumulative analysis. First, we need to step back a moment and [...]
Gold has not behaved like money in decades, rather gold is, for the most of the world, an investment class. We may not like such a development (it is one of the most insidious actions intentionally undertaken by central banks, including Basel rules) but gold is a liability on a bank’s balance sheet complete with a greater-than-zero risk-weighting. That means [...]
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