Markets are many things, but in simplest terms, they are a paradox.
From the Complex…
By this, I mean they are incredibly and intentionally complex, which makes them a kind of exclusive environment managed, allegedly at least, by cadres of well-versed experts (?) trained in, and comfortable with, complexity.
The extraordinarily complex mechanics, for example, of layered derivative trades or currency and rate swaps, the hedging of futures contracts on the New York COMEX or the maze-like liquidity and collateral movements in repo and reverse repo facilities are indeed settings of just mind-numbing complexity.
…To the Simple
But herein lies the paradox, for despite such deliberate and gated complexity, these markets—from the most basic ETF purchase to the most confusing asset-backed securities—operate upon one extraordinarily simple force, namely: Liquidity.
Or stated even more simply, everything hinges upon one question: Is there enough cash to keep these systems afloat?
And even if you have never had the time to study every market correction from the first Persian trading huts or Roman currency collapses to the great crashes of 18th-century France, 19th-century America or even the more recent ghosts of 2008, the key takeaway is equally simple: Every market crisis is at heart a liquidity crisis.
In short: Liquidity matters.
Engines Need Oil, Markets Need Cash
Liquidity—or cash flows—are like the oil levels in a basic engine, and anyone who has ever owned or driven a car knows it’s never a good thing when the dashboard signals a glowing, red low-oil warning.
Unless more oil is added soon, the warning phase progresses quickly to a stalled car phase.
What many investors may not realize is that these otherwise immortal risk asset markets are riddled with “low-oil warnings” which few are discussing, but which gold is recognizing.
Warning Lights in the Repo Market: Boring but Important
Take the current “Standard Repo Facility”—a topic so boring and complex that it’s easy to both ignore and misunderstand.
In simplest terms, the repo market is where big banks (“primary dealers”) go to get overnight loans (i.e., “liquidity”) from each other to keep their bank engines humming along.
It is here where they execute what are called “repurchase agreements”—i.e. where Party A asks for cash from Party B by offering Party B overnight collateral in the form of “safe” USTs.
The next day, Party A pays back the loan and buys back its collateral at a slightly higher price/rate than the Fed Funds Rate set by the FED (the FFR), otherwise known as the “repo rate.”
Such repo transactions keep the wheels of banking, money market yields and even hedge fund leverage tools comfortably “greased” and chugging along smoothly so long as the FFR and repo rates are aligned, affordable and hence: “Liquid.”
But when the repo rates begin to climb noticeably above the allegedly calming Fed Funds Rate, this is a dashboard warning that trust among the counterparties’ collateral is falling and that future liquidity is stalling.
Or, and stated more simply: Rising repo rates signal tightening liquidity, which for bankers is like the appearance of a rising shark fin for a weekend ocean swimmer.
Nervous “Experts” …
Recently, a bunch of market “swimmers” (i.e. primary dealers and their representatives) met at the home of the New York Fed in a very nervous mood and behind closed doors.
Why?
Because they are seeing shark fins circling and low-oil signals flashing from their dashboards.
The repo rates are decoupling from (rising above) the FFR, which means the cost of borrowing between insiders is getting painful.
This also means liquidity is drying and the engine of US and global markets (as literally everything and every asset is impacted by expensive liquidity) is slowly beginning to smoke, rattle and choke.
If repo rates go from rising to dangerously spiking, as they did in September of 2019, the engine stalls altogether, and the repair bill (i.e., Fed-injected liquidity) becomes extraordinary.
Prepare the Firehose
In other words, this means rapidly expanding liquidity measures from the Fed’s “emergency funding” source (aka: “reverse repo facility”), which is nothing more than QE (money printing) by another false title.
What’s equally creepy, and equally off the radar of most investors and coopted financial media sources, is that even before these nervous bankers met in New York, the Fed had already injected $125B of short-term funding operations to keep these repo rates “controlled,” but with little success.
Why?
Because after 3 years of Powell desperately trying to reduce the Fed’s embarrassingly fat balance sheet via QT while its commercial banking nieces and nephews on Wall Street were simultaneously reducing their own balance sheets to meet regulatory measures, liquidity was already quietly drying up even before the engine warning lights finally went red in the repo market.
The Past is Prologue
So, what does this mean going forward for markets in general or gold in particular?
By now, it should be no surprise to any that the Fed, which is a private bank owned by other commercial banks as part of a legalized cabal that is little more than a dishonest, unelected and insider trade, will do “whatever it takes” to keep themselves alive and “liquid.”
This means the Fed will inevitably, and once again, face an inflection point in which more bazooka/firehose money will flow into this “system.”
In short, “liquidity,” ultimately created from thin air, will save a now entrenched and parasitic system at the expense of the inherent purchasing power of the USD in general and the paper wealth of its citizens in particular, in this hidden backdrop of serfs and lords otherwise masquerading as free market capitalism.
The Future is Simple
As for gold, it may not be as human as our central bankers and primary dealers, but it is a heck of a lot more honest.
Its price moves today (which are increasingly less inhibited by the tapped-out COMEX and LBMA banks who lack the free-float to legally price fix precious metals) are telling us what our leadership and banks cannot, namely: Paper money is being debased at alarming levels to keep liquidity flowing into a debt-draped and broken system.
Throughout history, gold has always been nature’s honest monetary reaction to fiat currencies’ “human, all too human” debasement sins.
The market knows that more QE and QE-like liquidity is coming, which means a USD, which has already lost more than 99% of its purchasing power when measured against gold, will continue to lose its “punch” in the same way a glass of wine loses its flavor when buckets of added water dilute its vintage.
Gold, whose bull market is just beginning in such a backdrop, will continue its secular and historical rise, because fiat currencies will continue their secular, political, human and oh-so historically familiar fall.
In short, and despite pages, centuries and layers of complexity, the case for gold is ultimately as simple as that.
I like how you say a "stalled car stage" Matt. That's putting it rather mildly is it not. In many cases an ignored red flashing light ends with bits of con rod etc exiting the side of the engine block at mach 1. Rather like the red warning signals of Wall Street where, after being ignored for months traders have slipped on their Nike's and are running full tilt for the exits much like a bit of con rod🤣
Repo rates spiked in October 2019. we know what followed. Ein Schelm wer Böses denkt!
What will they trigger this time? Asking for a friend. What happens if the sizeable physical gold reserves of a sovereign nation overnight start glowing radioactive? What will that do to the price of physical? At least attention deflected from the crime at hand. Have a blessed day.