Golden Collateral Checking

Searching for clues or even small collateral indications, you can’t leave out the gold market. We’ve been on the lookout for scarcity primarily via the T-bill market, and that’s a good place to start, yet looking back to last March the relationship between bills and bullion was uniquely strong. It’s therefore a persuasive pattern if or when it turns up again.

To recap the main push of last year’s dollar shortage:

Over the past several dreadful weeks of liquidations the pattern has largely repeated. During the early morning hours, before regular trading opens, yesterday’s repo transactions are unwound. Under normal and even less-than-ideal conditions these are just rolled over.

Not any more. Collateral calls mean in some cases using gold as a last resort (which gets dumped immediately) and in others the buying of pristine collateral at any price. Gold is slammed while T-bill prices skyrocket, their yields plummet. For those unlucky enough to have neither option in front of them, fire sales of assets including stocks and other risk credits.

No gold “slams” in 2021, though; not even last Tuesday morning during what had been otherwise a near-perfect example of this scramble for collateral (scarcity).

This doesn’t necessarily mean the price behavior in gold has been inconsistent or refuting the notion. On the contrary, there’s been an ongoing modest/mild contraction in it thus possible corroboration worth serious and ongoing attention and analysis.

For what I do, I tend to look at gold via its relationship to nominal LT UST yields (since I’m more interested in other factors related to what’s going on in collateral). Many others, especially my colleague Joe Calhoun for more investment-focused considerations (and I encourage you to ask him all about the how’s and why’s), map gold against real yields. They both come up with mostly the same thing, despite some trivial quirks along the way.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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