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Repo Rumpus Foreshadows a Short Squeeze on the Dollar

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[I am leaving this essay up over the weekend to increase its exposure. RA] The Fed’s so-far $128 billion intervention in the repo market slipped off the Wall Street Journal‘s front page by evening, hardly a concern. Don’t be surprised if years from now the squeeze on short-term borrowers that caused this flurry of excitement is recalled as an early warning sign of the banking system’s coming collapse. On Tuesday, there simply weren’t enough dollars around to keep short-term loans rolling.  This implies that the dollar short-squeeze I first wrote about in Barron’s and the San Francisco Examiner more than two decades ago may have begun.

This time the Fed handled the problem without breaking a sweat. The next time, however, the cost might run into the trillions. Which is to say, more money than even the central bank can come up with on short notice. The banks won’t open the next day, nor will credit card transactions clear. There is no way that even a very prudent person can completely protect him or herself from the fallout, but it seems likely that those who hold Treasury paper and bullion as insurance will fare better than those who don’t.

A Curious Thing

Regarding the run on repos, it is curious that a dollar shortage developed in one specific market at a time when dollars remain almost inexhaustibly available in so many others. Mortgage money is not tight, nor are 0% teaser loans for any credit card holder who is not in prison. Big companies have no trouble borrowing billions of dollars to buy back their shares. But borrowers in the repo market? They are potentially like short sellers of a stock that has suddenly become unavailable.  Which is to say, they will be dead ducks on that inevitable day when even a slight whiff of panic wafts through the Battery.

Although these paper-shufflers probably don’t give much thought to the aggregate size of the borrowing they do, it amounts to something like a quadrillion dollars. That is the notional size of the derivatives market, and every dollar of it is tied in some way to all the other dollars. But why even worry about such things? To calm everyone’s nerves if there’s a run on bank reserves, the Fed can simply sacrifice Goldman Sachs or some other financial biggie the way it did Lehman on September 15 (!), 2008.

Bullion Will Move

It’s hard to imagine that gold will sit still when this drama unfolds. Usually a rising dollar weighs bullion down. But notice that the two have been ascending in tandem since June. Is this very unusual dynamic foreshadowing a crisis ahead?  Regardless, gold looks like bargain-priced insurance at current levels. It actually went down Wednesday as Wall Street smugly contemplated a rescue seemingly well done by the Federal Reserve. We kid ourselves to think this will be the last of it.

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GCG19 – Feb Gold (Last:1314.60)

EST

Gold took wing Friday, energized by weakness in the dollar. The $23 upthrust stalled almost exactly at the 1302.90 Hidden Pivot midpoint resistance shown, validating both the bullish pattern and a 1330.40 target we’ve been using for the last week or so. (Note: These numbers differ slightly from the ones given here earlier because the pattern’s point ‘C’ low changed.)  The 1330.40 ‘D’ pivot will become our minimum upside objective if the futures can close for two consecutive days above p or trade more than $3 above it intraday. Traders please note that a pullback to the green line at 1289.10 from around 1310.00 would trip a ‘mechanical’ buy signal, stop 1275.20. Stay tuned to that chat room for further guidance on this in real time.______ UPDATE (Jan 28, 4:17 p.m.): The futures look like they’ve consolidated sufficiently for a decisive push past the 1302.90 ‘midpoint resistance’ noted above. Once this occurs, the 1330.40 Hidden Pivot will be in play as our minimum upside objective for the near term. _______ UPDATE (January 29, 12:01 a.m.): Shifting to the April contract, here’s a chart that shows a 1336.40 target equivalent to the one given above for the February.

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GCG19 – Feb Gold (Last:1282.60)

EST

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GCG19 – Feb Gold (Last:1294.20)

EST

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GCG19 – Feb Gold (Last:1300.00)

EST

The tortuous rally begun in August is nearing the end of the line, a modest leap from a 1281.20 target that is the highest I am able to project using the intraday charts. This doesn’t mean the futures can’t go higher, even if the target provides resistance enough for scalpers to go short against it (tightly stopped, of course). What we should want to see is a move past 1281.20, since that would imply the trend is likely to continue.  I hesitate to say the breach of the resistance need be easy or decisive, since that is not the way gold has been rolling lately. Any breach to the upside would be welcome, but we can only give it time, and be prepared if things don’t go quite the way we might wish. _______ UPDATE (Dec 26, 6:32 p.m.): After peaking at 1282.30, an inch above our target, the February contract has relapsed by more than $15. We’ll be able to judge bulls’ mettle by how quickly they can recover and push above 1281.20 — or better yet, close above it. _______UPDATE (Dec 28, 4:15 p.m.): There’s nothing more bullish than an uptrend, as the saying goes, but gold’s trek higher has been labored and tedious. As long as the February contract continues to push past Hidden Pivot resistances, though, our trading bias should remain bullish. The next lies at 1292.60_______ UPDATE (Jan 2, 9:43 p.m.): The futures fell $5 after coming within two ticks of the 1292.60 target. The subsequent recovery has been quick, however, portending another leg up. Use p=1292.70 as a minimum upside objective, but expect more progress to 1298.50 if the initial ‘hidden’ resistance is easily brushed aside. Here’s the chart._______ UPDATE (Jan 3, 10:31 p.m.): Gold has been exceeding targets almost daily — not demolishing them, but penetrating them with sufficient force to put the next in play. That would now be the 1302.50 target shown here. Above it, the biggest remaining challenge, technically speaking, would be to take out an important ‘external’ peak at 1330.40 recorded. on June 14.

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GCG19 – Feb Gold (Last:1247.60)

EST

Gold continues to make headway in herky-jerky fashion, failing to fully satisfy bulls but also denying bears much to cheer about. On Monday, the February Comex contract rallied to within a millimeter of the 1240.20 Hidden Pivot target shown. The pullback so far has been mild, encouraging the thought that the next pop will be good for a ride to 1259.80. Another encouraging sign is that some recent ‘mechanical’ buy signals in gold vehicles, including one in HUI, the Gold Bugs Index, have been winners.  We’d sworn off this type of trade in bullion after getting stopped out once in the futures, but they seem to be working again. This implies that buying enthusiasm has picked up a little over the last couple of weeks. For your information, the February futures is currently on a ‘mechanical’ buy signal that tripped at 1216.80, stop 1202.40.______ UPDATE (Dec 7, 4:00 p.m.): The February contract climbed as high as 1255.80 today. Just a smidgen more! We want buyers to blow past that Hidden Pivot, since that would announce their intention to push still higher. _______ UPDATE (Dec 12, 9:59 p.m.): Zzzzzzzzz. _______ UPDATE (Dec 16, 12:17 a.m.): The futures have rolled down without having achieved an ‘easy’ 1259.80 target, but also without having exceeded any external peaks on the most recent upthrust. Taken together, these signs of weakness suggest that gold’s balky uptrend since August is not destined for greatness. We’ve made similar observations scores of times since the gold price peaked above $1900 in 2011, and the only thing that has changed is that bears have become too depleted to sell off bullion except for short periods when conditions are perfect. It is not a bull market we are seeing at this point, but neither is it much of a bear. _______ UPDATE (Dec 17, 10:18 p.m.): Zzzzzzzzzzz. The 1259.80 target remains viable, but it’s hard to get excited about it. If a rally were to impale this Hidden Pivot resistance, that would be another story._______ UPDATE (Dec 19, 9:43 p.m.): The little hoser poked its snout above 1259.80 for all of an hour before tanking big-time. The plunge was the worst one-day reversal we’ve seen in recent memory, although anyone following my updates couldn’t have been too surprised. This chart shows how the actual top missed an alternative target at 1262.40 by just two ticks.  The trend remains balky but bullish, implying we’ll need great patience to profit from it.

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