I suppose it’s easy to look at gold and see only fear. It is, after all, the ultimate currency hedge. Therefore, if the price is rising there is probably a good chance fear over monetary considerations is, too. The opposite interpretation, then, would appear to be just as straightforward, but it’s often complicated by the mechanics of wholesale global eurodollar financing.

It was a lesson reinforced in 2013 as gold prices slid, even crashed. Economists, as I wrote with purpose two years after, were practically giddy over the price reversal. Seeing an end to the “fear trade”, they should have been looking instead at looming collateral concerns.

The idea of gold prices behaving like a zero-coupon bond is in some ways relevant to this problem. Economists only think of the asset side of that paradigm while never moving beyond that into liabilities. A government bond is an asset, sure enough, but it can also be part of the liability structure in repo. Just as government bonds act as collateral, so too does gold.

Though they would fail to ever admit as much, by the time I wrote that in May 2015 the “rising dollar” was already through its first phase leaving no uncertainty about what it was – monetary illiquidity throughout the global system. The gold crash in 2013 was a warning about what was coming; not the end of the fear trade at all but the next stage of the same eurodollar decay process coming at us in distinct, discrete phases.

The problem for economists and the media is that they never learn. For every one of these monetary downturns, so to speak, they look upon the ensuing upturns as if they are a final end to all of them. You would think by now that after three complete cycles that they would have caught on to the game, a distinct pattern having emerged in this way. Nope. Each “reflation” is still treated as recovery, the final recovery.

This is simple to explain, a bias so deeply embedded it overrides common sense and clear observation. There has to be a recovery, economists believe, so any positive trend is lustily given those proportions and expectations no matter how much evidence is stacked against it.

This view leads the mainstream to dismiss what are otherwise clear and often stark warning signs about the impending arrival of always the next one. Part of it is the time element, meaning that we are conditioned to see these things, crashes being one possible form, as short, condensed affairs. They are not; never have been and never will be.

These are all processes playing out at a much longer timeframe, where negative factors build up over time, a clear ebb and flow even at different scales (almost a power law kind of behavior). The 2008 panic was actually two – the first one ended at Bear Stearns. It was that which convinced the FOMC in particular that the worst was over (read the 2008 transcripts between Bear and Lehman and marvel at the cautious but clearly optimistic tone).

Even the “rising dollar” was really two parts, the first included the initial oil crash (rubles and junk bonds, too) until the January 2015 Swiss action; the second rudely announced in Chinese “devaluation” that August through to February 2016.

And those phases or parts could be further divided into smaller pieces, all clustered around or following what were distinct warnings, which taken individually might appear to be small little trivialities. The events of 2013 told us a lot about what to expect in 2014, including gold (and other commodities), despite then the ongoing Reflation #2.

In large part because of all this, whenever I see gold drop in concerted action (particularly those annoying and “unexplained” early morning Asian market “pukes”) I immediately think of collateral, not recovery. Going back to that specific week in September 2017, it’s hard to see otherwise.

What was it that happened the week of September 7? Like the events of October 15, 2014, we simply may never know the specifics; and in all likelihood, as that earlier episode, officials will try their very hardest never to.

What we do know is that a bunch of very important indications all changed in unison that week. Since I have a particular emphasis (weirdly obsessive) on China and its ongoing “dollar” problems, it always seems like a good place for me to start.

We also know that China unlike others has been able to mask or really transform its eurodollar funding issue via connections in Hong Kong. What those connections are, or the specific transactions (more likely series of transactions) related to them, is not at all clear. All we can reasonably suspect is that an immense amount of creativity is on display.

The more immediate question is whether China’s Hong Kong bypass is the cause or the effect; did China’s interrupting the “dollar” flow particularly in terms of collateral spark the repo market outrage the week of September 5/7, or was there a specific perhaps unrelated US$ repo problem that made the Chinese effort too costly to continue past that point?

We might begin to answer that question by following closely what came next. As noted in Part 1 of this exploration, the reverberations in US$ funding far beyond the repo market were felt globally from Mexico to Brazil and back to Hong Kong.

For CNY and HKD, that meant hard reversal. After surging for months, the Chinese currency backed off until it seemed stable around 6.62 – 6.64; HKD started rising until November 8 when it traded above 7.80 for the first time since June.

Once is a coincidence, twice is a pattern. After HKD started to fall again, and CNY on a slight rise, a little over a week later in mid-November repo fails jumped in spectacular fashion. And that’s not even the most interesting aspect of all these weird connections.

This is:

That’s right, repo fails the past two years have now exhibited a clear seasonal pattern. And not just any seasonal pattern, but one that we have seen elsewhere before:

Hong Kong is what has changed since the last “rising dollar”, the city drawn deeper and deeper into the Chinese eurodollar maelstrom. We at least know why that has been, given that clear official priority was established surrounding a stable CNY. But no effort is cost-free, nor do central banks (if indeed the PBOC is involved; and it may not be, this could be Chinese banks acting on their own, though I doubt that’s the case where at the very least they have been given official approval if not outright orders) tend to act nimbly.

This would seem to suggest that the Chinese are the cause of the seasonal disturbances rather than the effect. Seasonality like this reveals the weaknesses in a weakened system, the bottlenecks that suddenly appear wherein a healthy system their presence is hardly if ever noticed and noted. Like the tide rolling back to reveal the ocean’s hazards, lower global “dollar” liquidity has made these interventions/strains become very apparent.

It’s amazing stuff, the eurodollar system from a purely intellectual standpoint is surely one of the most astonishing things ever constructed. But since officially it doesn’t exist, and because all that central bank “money printing” has made it impossible for the mainstream to look to the monetary system as the world’s primary problem, it all goes on unappreciated and wholly unacknowledged. That’s why everything has been “unexpected” for ten years – and continues to be to this day.

These monetary ups and downs are not single events, but processes or a series of episodes that when strung together truly expose a clear pathology. This is how you lose an entire decade for the whole global economy, to completely ignore all this evidence and what it means simply because you want so badly to believe in a technocracy that never actually existed. Even the technocrats who best understand the madness, the Chinese, can’t seem to get out from underneath, or just get something to go right.