Gold Slams! Rapid, huge sales in early morning hours are warnings about a malfunction deep within the plumbing of global capital flows. They're also multi-week, precipitous price declines. We review the last few months of gold price to triangulate if the pipes are rattling warnings.
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-----SEE EPISODE 93-------
Alhambra YouTube: https://bit.ly/2Xp3roy
Emil YouTube: https://bit.ly/310yisL
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----EP. 93a TOPICS--------
00:33 Show introduction; gold, what does it tell us about the state of global shadow money?
00:33 Show (potential) sponsor; Jim Cramer's 2007 rant warning of crisis as the Fed slept.
04:00 Gold belongs in a broad panel of measures that gauge the health of the monetary order.
07:14 Gold slams can be both fast, early morning affairs as well as long, weekly selling.
08:44 Defining what it means that the Fed custodies US Treasuries for official foreigners.
10:56 Long gold slams took place in 2011, 2014, 2015 and 2020 during global dollar squeezes.
13:59 The Fed is staffed with academics who focus on mathematics of models, not markets.
17:09 A review of the historic relationship between gold and US Treasury 10-year bond yields.
19:42 A review of a recent break in correlation between US Treasuries and gold.
22:20 A review of the relationship between yields, gold and the Fed's Reverse Repo Program.
23:48 Fed custody of US Treasuries by official foreigners peaked recently in Mid-March. Shock!
----EP. 93a REFERENCES----
Golden Collateral Checking: https://bit.ly/3j7HKmS
Alhambra Investments Blog: https://bit.ly/2VIC2wWlin
RealClear Markets Essays: https://bit.ly/38tL5a7
-----------WHO-------------
Jeff Snider, Head of Global Investment Research for Alhambra Investments and Emil Kalinowski.
Art by David Parkins. Podcast intro/outro is "" by from Epidemic Sound.
---------WHERE-------------
Twitter: https://twitter.com/JeffSnider_AIP
Twitter: https://twitter.com/EmilKalinowski
Art: https://davidparkins.com/
-----------TAG------------
#JeffSnider #Gold #GoldSlams
See Full Interview Transcript Below
Emil Kalinowski: Not just in isolation gold buy hold inflation deflation audit the Fed conspiracy no no we're going to talk about gold how it fits within the monetary the shadow system where does it fit in the euro dollar framework and what does it have in common with treasury bill yields the Federal Reserve's reverse repo program holdings and early morning Repo collateral scrambles but first ladies and gentlemen if this show was sponsored a potential sponsor might be YouTube where you could find all manner of cat videos but also on August 3rd you will be able to watch and commemorate the 14th anniversary of the oracle of CNBC losing his mud on Squawk Box yes Jim Cramer August 3rd 2007 came on and was absolutely apoplectic talking about how the Federal Reserve is out to lunch and their people are losing their jobs and firms are going to go out of business and it's nuts and they have the Federal Reserve has no idea what it's out like there and screaming and it's wonderful we haven't seen anything like it since Bill O'Reilly lost his mind on Inside Edition you remember that and he said he was going to do it live well ladies and gentlemen it turned out that a few days later the FOMC met and they laughed at Cramer on August 7, 2007 Jeff Snider head of global research for Alhambra Partners what other memorable comment was made on August 7 2007
Jeff Snider: I think there were quite a few actually although I'm not sure how many people are aware of them or how they probably don't realize how memorable they were but to me the most famous from August 7 2007 again this was a this is one of those emergency FOMC conference calls where they got together and said there's a lot of chatter out there things are going on what are you guys hearing because we don't see anything wrong here and at the time a guy by the name of Bill Dudley happened to be the open market desk manager which is probably the Fed's most important position inside of the Federal Reserve I mean the chairman gets all the attention and really that's kind of the point everybody looks at the chairman and gets his you know Ben Bernanke and his persona but as far as the function of monetary policy the open market does the system open market desk manager is kind of the go-to person when it comes to the nuts and bolts of these things and that was Bill Dudley back in August 2007 and he said I've talked to people on the street Ha! There's nothing going on we don't see anything imminent anywhere I'm talking commercial paper countrywide mortgages all of this stuff nothing is imminent
Emil Kalinowski: And how many days later after that meeting did the crisis begin
Jeff Snider: Two, exactly two days two days later not only was the crisis eminent it was there wham and as we talked I mean you know the Northern Rock CEO put it best the world just froze or the rule you know everything just stopped on August 9th and here are these geniuses, these monetary wise, monetary stewards on August 7th saying there's nothing imminent, the funny thing about it was what made this quote memorable even more memorable in my mind than Ben Bernanke's subprime can contain the fiasco was that Bill Dudley identified several things that he said were not imminent there was no trouble imminent among them was commercial paper said nothing imminent in commercial paper when two days later the commercial paper market as we know it ceased to exist that's pretty much how good these people are in the internals of monetary policy, I mean this one goes in the hall of fame of worst possible takes
Emil Kalinowski: What they should have been doing is looking into the shadows into the monetary system now you can't look into it directly, you can't measure it directly, because it's in the shadows we have to measure the monetary system's impact on other things that are visible and then interpret what that might mean and over the last several weeks we've been talking about US treasury bill yields the level of the Federal Reserve's Reverse Repo program the holdings and then also collateral scrambles very early in the morning in the Repo market and in your article called Golden Collateral Checking that was posted on the 26th of July at Alhambra Partners you bring a fourth measure into the discussion that we want to keep an eye on and I think people would be very surprised that it's the ancient metal when we're talking about the modern monetary system tell us a little bit, why gold?
Jeff Snider: Yeah, it's not only just the ancient you know the what used to be money actual money was you know physical metal nowadays we use the term money loosely on pretty much anything which you know I guess you know defines the era that we've gone through the euro dollar era where the with the with the we've blurred the lines and definitions of money itself but I think people are surprised number one that gold can kind of get caught up in this mess number two in the ways in which it does get caught up in this mess right because when we see these telltale signs of scramble for collateral, collateral shortage, whatever you want to call it you know it ends up being negative for gold, gold gets sold, it gets pounded, it gets slammed, you know go back to last march you and I talked about this a lot since you're you know you're in the precious metal business you know this very well on these same mornings we see these liquidations happen before the liquidations happen during this Repo window as I call it you know the early morning session and really up until about 9:30-10 o'clock in the morning most of the activity gets done up until the us open and there's a little bit a little bit scrambling scramble up until around say 9:30-10 o'clock but you would see T-Bill rates just sink they would just drop and it was clear that there was so much enormous demand over and above investment considerations for treasury bills and you could match intraday in these overnight sessions T-Bill rates with gold prices and they would go tick for tick with each other and even if you didn't have any idea what was really going on here you would say I mean this is a correlation we can't just ignore it's there and it's there repeatedly so something is going on that links these gold slams, these early morning gold slams with what's going on in treasury bills and then of course when we get to the regular trading session everything gets liquidated including stocks and everything else that had been beforehand pretty much impermeable to any kind of negative factors so we got all we got a progression a series of events that are all correlated together that don't that all look at the entire system as it's breaking down and telling you as you pointed out you know we're using these what's going on in these visible indications to piece together what must actually be happening in the shadows and gold was very much a part of that
Emil Kalinowski: And gold slams the way you look at it is those early morning sales, now Jeff that's of course perfectly correct but you know what I did a look myself and my gold slam definition is a little bit looser a little bit more liberal than yours
Jeff Snider: And as we said last week there's this is there's terms of art here we don't have no we don't have precision we don't have you know equations we're not we don't we're not fooling ourselves like economists putting up econometric you know regressions and telling you that we have you know a precision to the seventh decimal point there's a lot of art here there's a lot of you know analysis and opinion
Emil Kalinowski: And you know what maybe I even said it wrong that it's the I have a looser definition I would maybe this is kind of a different vintage or a different fractal you know a time there's the time the short ones that you're talking about but I'd like to draw attention of the dear audience to a little bit longer slams that do also correspond to another kind of collateral sale and so the graph that I've pulled up right now is the gold price that's the gold line and then the little bars the area graph at the bottom that represents US treasuries but custody holdings by the Federal Reserve for foreign official and international accounts Jeff you'll do a much better job explaining that can you just tell the audience what these things are and why they're important US treasury is in custody
Jeff Snider: That is the reserve managers around the world who as you know the Euro-Dollar system developed and threw off all these dollar resources into various countries a lot of those dollar liabilities or dollar assets got in became into the hands of foreign official institutions whether they be central banks or foreign treasuries or something like that and as an accommodation to help out foreign governments around the world the Federal Reserve Bank of New York custodies those US treasury assets on their behalf so it actually the Federal Reserve bank of New York actually acts as custodian for these treasury accounts and there's not just treasury, there's other assets too but we're specifically dealing with treasuries here and if you if you graphed the absolute value of those what you see is they rise rapidly during the euro dollar mania era up until the first financial crisis then we get into the post-2008 period it gets a little strange where we see the level of treasuries in custody at Federal Reserve Bank of New York on behalf of foreign officials tends to decline when we see these other kinds of indications of a dollar shortage so it goes together with the TIC data in that and this is separate from TIC it goes together in the debt and the TIC data word says treasuries tend to disappear from foreign hands when there's a dollar shortage and that kind of makes sense either they're being used in some other compassion lent another in some other fashion being lent out to other local banks that are starved for dollars or just sold outright liquidated to raise cash to pay off euro, dollar liabilities so here we have and I love how you do you've gone all the way back to 2011 Emil to show that this is not just last March this is something that we can we can look at dependably where gold is definitely part of this mix where we can say look here we have a couple different indications from very different sources, one real-time data and market prices another one a custody account at the Federal Reserve Bank of New York we put those two things together and there's a collateral dollar shortage indicated in both of these things and it's very consistent going back more than a decade
Emil Kalinowski: That's right exactly so you would notice these things should be rising if the monetary system is expanding custody holdings we see sales rarely and consistent sales or sales in bulk, in volume, that's during these dollar shortages and look at what we see with the gold price which I've circled here significant falls that's just 2011. here's from 2014 Jeff again sudden sales in custody and then drops in the gold material drops in the gold price over several weeks that's not only it in 2014, we saw it in 2015 as well and as you were just mentioning earlier 2020 as well
Jeff Snider: Yeah we have you know we can go back to all those you know back to 2011 for example you know the graph that you showed there where did those treasuries start to disappear from the custody account in August of 2011, what happened in August of 2011? Well August 9th 2011 there was another one of those emergency conference calls on the Federal Reserve where they said we can't believe what's happening here we've got $1.6 trillion in bank reserves yet we're talking about bailing out the Repo market because illiquidity is so I mean TAF auctions and overseas we need to go back into crisis mode even though we've quote unquote printed $1.6 trillion in bank reserves and that correlates so we have we have a very consistent correlated story that links gold to custodies and treasuries to TIC to T-Bill yields and even FOMC discussions talking about illiquidity deep inside these markets and I want to go back to you know Emil something you said earlier okay you know the visible the visible spectrum of dollar shortages it's not something the Fed didn't know about. going back to 2007 even in those discussions in 2007 you know Bill Dudley would say there's you know there's weird stuff going on in the euro dollar futures market it's inverted they would notice this stuff and then say nah no big deal there's just a lack of somebody on the other side willing to take the trade and move the curve back to where it is not realizing what they were actually saying the reason nobody was on the other side taking that trade was because they agreed with it right if you actually think there's not really much money in taking the other side of an inverted curve and you agree with what the inverted curve is that there's a probability to something bad and therefore you not want to be long into a big crisis so what happened was they did what we did they're looking at these markets and saying we're seeing these things move but then sort of getting into this mode of denial that can't possibly be true we're the Fed if we want to do what we want to do we're going to do it nobody, you'll fight with us and here we had an almost a year period where the markets were saying sure you guys are the Fed but we don't believe you're going to get this right and that repeated in 2011 and again and again and again
Emil Kalinowski: I think part of the reason for this latter point Jeff is because the Fed is so staffed with academics which are perfectly fine people sounds like a wonderful life to be an academic but I think you need more people from Wall Street who have had their rear sector handed to them by the market so that you have some humility knowing this market is telling me something and it's important for me to pay attention to it whereas if you're an academic you're highly credentialed, you're acclaimed, you're in the citadel of monetary power why should you listen to markets who's right you yeah not the markets so I think that's a big problem is this well like I guess it's the ivory tower
Jeff Snider: Take that a little bit take that a step further Emil and it's even more correct for lack of a better term because the academics focus on something else entirely, academic economist and you're right that's what that's the people at the federal Reserve are any central bank they're academic economists and what they focus on is mathematics and not the mathematics of money but the mathematics of these DSCE Econometric Models describing okay what's the relationship between inflation and unemployment or you know what is the multiplier factor for fiscal stimulus package there's no real place for in those models for actual money they just kind of assume and they have assumed for a long time they don't need to model money because the Federal Reserve gets what the Federal Reserve wants and so why waste your time in brain power trying to come up with a model for a monetary system that you're convinced simply obeys monetary policy inputs and so the academic economists start from a premise the worst possible premise which is they don't need to pay attention at all to any of these things so when Bill Dudley's talking about inverted curves and euro dollar futures they're like, so what, that's not even in my model my model is the world it's the universe so yeah so that point you just made is yes that's the biggest problem here is because the people and the irony is the people who are running the supposedly monetary center of the universe don't care about money at all it's not even in their models and it's kind of one of the one of the one of the weird ways that you can explain how things got to be the way they are in a sort of very granular way when you look at Bill Dudley talking about these things and then all those the people around the table going no big deal and then two days later everything breaks down and they're all shocked and can't believe it actually does make sense it's not just some kind of Hollywood story you know really bad Hollywood script that got thrown out for being so unbelievably implausible, it actually happened that way
Emil Kalinowski: Ladies and gentlemen if you want to know more about the Federal Reserve which I'd love to keep talking about I got several points I want to raise but we're here to talk about gold then go to Episode 92 where we spent 95 minutes reviewing the last 14 years of Fed actions through the lens of a recent frontline documentary, all right Jeff I'm going to pull up your graphs now where you've got gold and you've got US treasury nominal and real yields and just tell us what you're seeing and I guess why you wrote this article
Jeff Snider: Well normally there's a really good inverse correlation between gold and the treasury market and then we're going back a couple of years to 2018 it's almost perfect and you can see it visually I mean it's a straight it almost makes a perfect X here and even in you know you know I love how you brought in self-similarity and in variance to scale it's not just a perfect X in the law in the you know the big time scale there's also you know smaller perfect and more inverse correlations over shorter time periods and whatever I mean and that makes intuitive sense too even though it doesn't necessarily from the mainstream perspective which holds that gold is nothing more than an inflation ad and that's not really true it's actually a very poor inflation hedge you know you go back to the 80s 90s and 2000s gold performed poorly against the CPI what gold is a hedge against big errors and the runaway inflation of the 1970s actually qualifies as one of the biggest errors in money and economics so that's why gold performed well during the 1970s once it was allowed to float in price even though it had there was a two-tier pricing back to the 60s so it sort of had breaking away from the early state of the great inflation so it's a big error hedge but a big error doesn't necessarily mean runaway inflation it could also mean deflation and fragmentation and monetary uncertainty as we've seen since 2018 because the big risk going back to especially October, November, 43435 have absolutely not been runaway inflation even though that's what they've all said in the mainstream media instead we've seen inflation go down, the economy slump globally and yet gold prices were rising often precipitously as bond yields were falling so if deflationary signal and bonds what's going on in gold well the same thing and it makes sense because you know gold's primary, the primary argument against holding gold is it doesn't pay any interest how so the opportunity cost to cold and gold is essentially risk-free interest rates so if you think risk-free interest rates are going lower and going to stay lower, the opportunity cost of holding gold goes way, way down therefore that that that lends some more value and bid to the gold price so that's why you can see this inverse correlation between treasury yields and gold prices deflationary error signals
Emil Kalinowski: And so you raise a few dates in your report you raise let's see what dates are they June 30th, July 1st and July 15th and why did you bring those dates to our attention with respect
Jeff Snider: On the chart that you know the part that I had circled which was recently it's kind of a you know it's our correlation broke there because as you can see on the right part of the chart since middle of March treasury yields have fallen as well as yield real yields have fallen but you know maybe not as consistently so there's an argument there but anyway nominal treasury yields have fallen since march and gold was moving up as you would expect given lower yields then around the end of May suddenly gold began to fall even though treasury nominal yields were falling too so we broke our correlation there for about a five week period and a pretty you know pretty severe way not the first time but you know it's one of those things that you go okay what's going on in gold here and it's the decline in gold prices ended on June 30th and you saw go back up in early July up until July 15th and now gold prices are kind of sideways to lower since July 15th and these dates show up in the treasury bill market so we're kind of wondering here are we seeing like you had like you had shown before historically are we seeing a larger scale gold price decline that is indicative of collateral pressures because we saw those in T-Bills during the same period May, late May and June quite a bit of these instances of scramble for collateral indications of shortage rising levels in the reverse Repo rate which is an indirect indication of collateral scarcity and also now we have golds falling against falling treasury bills or treasury yields so you can see you know May up until July first treasury bills are giving you that signal there's excess demand for collateral which is consistent with lower gold prices and then that middle part of July or the first part of July till around here it says July 21st all their secondary pricing models say July 15th which is exactly when you saw the recent high in gold so that it kind of correlates too so you have to wonder are we seeing these collateral pressures play out in the in the breakdown in the correlation of gold over the last you know couple of months or so
Emil Kalinowski: And the Reverse Repo program held by the Fed which we've talked about on previous episodes we believe it's several signals one of which is there's a collateral squeeze shortage that is not being satisfied by the private market so they're going to the Fed and as you draw out in your graph here in this article you know hey it started to rise again we hit a peak settled down it's rising again
Jeff Snider: Which again matches both T-Bill rates and their behavior as well as what happened short run in gold right because we had that may to the end of June we have rising RRP levels the same time falling gold and then the first couple weeks in June all those things kind of backed off gold rose T-Bill rates started to behave better and even lower balances in the RRP but in the second half of July gold isn't exactly I mean it's been lower in some days it's sort of it's been up over the last couple so it's kind of sideways so nothing real definitive there but it's not higher like it should be as US treasury nominal yields are falling and real yields have been sinking so you would think that gold sideways in a way is already sort of a red flag because gold prices really should be rising much more rapidly given what's going on in the behavior of yields so we're wondering are we seeing a consistent signal here where RRP, treasury bills starting to misbehave again lower nominal long-term yields and gold prices that are at least not rising like they might otherwise
Emil Kalinowski: Jeff I'm going to ask you to summarize this article if you have any further thoughts but before I do I want to go back to the custody holdings of US treasuries by the Fed of treasuries for you know foreign institutions and bring us up to date and I think you'll be very interested by this graph here I'm going to pull it up right now so this is from the FRED site and it goes all the way back to 2017 and let's say that was at the end of 2016 was when we had our last euro dollar crisis number three the Asian one kind of stopped and what did we see we saw custody holdings start to rise as we would expect in a reflationary expansionary monetary order, it peaked in early 2018 again and then we see the landmine even in this memorandum item in a balance sheet of the Fed we can see the monetary system and because in October we started to see a serious decline a recovery to the beginning of the year in 2019 and then from early 2019 all the way through the end of the year we see a decrease warning, warning, warning and come the corona big drop then a recovery a recovery during the reflation Jeff looking at the farthest the right side what do we see we saw a peak and now a steady decline
Jeff Snider: Where was that peak Emil?
Emil Kalinowski: Will you be surprised, March 18th coincidence Jeff Snider?
Jeff Snider: No, we don't believe in coincidence well we do if it's you know one thing correlates with another occasionally that's a coincidence but when you have and to summarize what we're talking about here you know this is a memo item in the Fed's data it's not something those people even is aware exists but what we're doing here is because you've laid out beautifully at the beginning here we're trying to look at what goes on in this the system we cannot directly observe and so we have to piece together all of these behavioral changes does this change with this correspond with this does this correspond with that and when you start fitting together very different pieces of data with real-time market prices and it's one after another, after another, after another that cannot be random coincidence what we do here I mean because this is all publicly available information we're not making this information up you can all look at this you can go to and look at everything we're talking about all we're doing is trying to give people a sense of how to interpret these correlations that cannot be random what is it that we think is going on that explains all these things and what you'll find is it's nothing like what they say in the media or the textbooks or what comes out of Jay Powell's mouth except for the occasional accidental truth that he spilled like he did to congress when he said not a lot of T-Bills so by and large what we're doing is putting together the pieces you know and even finding different pieces that fit into what is a consistent coherent picture of what we believe is monetary reality which then becomes financial reality and eventually economic reality which does impact everyone's daily life whether they know it or not
Emil Kalinowski: In part two of this episode we're going to talk about the Asian financial crisis and foreigners selling us treasuries what does that have to do with our current economic recovery you're going to want to know treasury bill yields, the Reverse Repo program holdings, early morning Repo market collateral scrambles and now gold what all these things have in common they're warning something is happening at least in those first three and the question is it happening in the fourth one as well gold we're going to talk about it gold, gold, gold. Ladies and gentlemen we're gonna talk about gold
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