Central Planning Is More Than Just Friction

The Fed has driven the market to this state because of course, it has control of the overnight rate. So the shorter maturity Treasurys such as 1-month move nearly in lockstep with the Fed. However, demand for credit is soft. So the rate on bonds is not very much above the Federal Funds Rate (currently 2.4%).

The Fed is being hawkish, while the credit market is being tepid.

Here is a chart showing the spread between the 2-year and 10-year bond, for five years.


It’s been falling for a long time.

Think of this in terms of the decades-long trend of rising asset prices, which is the same as saying the trend of falling yields. Now, the Fed thinks to push down bond prices. But it does not have control over the long bond price, only the Fed Funds Rate. Meanwhile, the bond price wants to go up, while the price of the short-term bill is forced down. There will be inversion, if the Fed persists.

What will give? Will demand for credit suddenly spike? Color us skeptical. Will the Fed back down, and begin cutting rates? Or will defaults begin to cascade? We think the latter is the most likely.

Now let’s look at the only true picture of the supply and demand fundamentals of gold and silver. But, first, here is the chart of the prices of gold and silver.


Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It was up this week.


Here is the gold graph showing gold basiscobasis and the price of the dollar in terms of gold price.


Gold is scarcer, and its price is up. For years (with many gold writers promising gold to skyrocket any-day-now all the while), we did not see this pattern. A higher gold price meant higher basis (blue line) and hence abundance. A higher gold price was due to speculators buying futures.

Now, we see the opposite. A higher gold price is due to buying of metal. Will this new trend endure? Stay tuned!

The Monetary Metals Gold Fundamental Price has broken above $1,400 for the first time since Q2 last year (and before that, 2016), now $1,407.

Now let’s look at silver.


The silver cobasis (i.e. scarcity) shows an even bigger move this week. This is the May contract, so should not be under selling pressure due to the contract roll yet—it is under buying pressure from the roll of the March contract.

The price of silver may have dropped a bit this week, This is another long trope of the gold and silver writers, but this week in silver it is true: futures sold a bit but physical is being bought.

The Monetary Metals Silver Fundamental Price rose 43 cents to $16.52

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Gary Anderson 1 year ago Contributor's comment

Two things. First, you spoke about hoarding, but not about bond hoarding. Second, you mentioned the dollar and gold as money, but if you ask a clearinghouse, bonds are the real money. They are the collateral. So, there is a stability there. I am not saying it is a good system, but after MBSs blew up, interest treasuries became the collateral of choice and we entered the new normal.