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GoldFix Weekly: "Middle Class Prosperity Died With the Gold Standard"

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by VBL
Sunday, Aug 15, 2021 - 11:58
Welcome. GoldFix Weekly is original content. The goal is to give you, the reader, some basis for looking at markets as you prepare your own trading week. Second, it aims to give you more tools, or at least the basis for developing your own tools to navigate markets. To that end we expect there will be changes based on feedback. Gold is the jumping off point for analysis.

 

 
This Issue
  1. Markets: weekly summary
  2. Precious: gold summary
  3. News: stories on metals and markets
  4. Technicals: active trading levels
  5. Tools: educational videos
  6. Charts: related markets
  7. Calendar: next week
  8. Disclaimer: read this
1. Markets
 
Capital Markets Summary
The stock market is supposed to be a forward-looking mechanism. Most data we view is backward-looking. So when data is bad, we take solace that stocks view the future, not the past. What happens when one of the few actually predictive reports completely dives?
The U-Mich Consumer sentiment cratered to levels lower Friday than when Covid panic gripped the nation. The last 6 times out of 7 (in the last 40 years) that sentiment crashed this hard, the US was in or entering a recession.
 
Some quotes from the U-Mich report:
Just 32% of consumers thought that the economy would improve, well below last month’s 45% and the 50% in June.
The extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end
Although the small August decline in year-ahead inflation expectations is consistent with the transient hypothesis, the recent data on long term inflation expectations were not: inflation was expected to average 3.0% over the next five years.
On the week, The Dow outperformed (which has been relatively unusual) with Nasdaq breaking even and Small Caps tumbling. Every day the cash open was utter chaos before everything calmed down in general.
Notably, this week saw the energy sector cap a 19-day streak in which no member of the index traded above its 50-day moving average, the second-longest span since the late-1950s, data compiled by SentimenTrader show. That’s something that hasn’t happened since the summer of 2001 when Enron and its ensuing bankruptcy was pressuring the energy complex.
The dollar plunged Friday starting around the European open, and accelerated on the confidence collapse. That drop took the reserve currency negative for the week, and erased most of last Friday’s payrolls print gains.
 
After a volatile week, all major US equity indices closed higher by around 1%. Financials outperformed as higher rates are good for their business, energy ended unchanged held back by the price of Crude oil and staple goods ended lower on the week. Bonds had their worst week since June.
As the dollar dipped, gold ripped higher, erasing all of Sunday night’s flash crash and some of the payrolls plunge. Bitcoin rebounded strongly today after weakness yesterday, closing back above $46,000 (highest close since May). More on that in the news items. Full Recap
2. Precious
 
Activity Recap
Real rates went slightly more negative on the week. The dollar sold off hard on Friday. This made for a nice recovery on the week. Gold actually took back some of the losses from last week’s payroll debacle. Given where real yields are, it has more room to run here. The market is almost in orbit around $1800 again.
SUNDAY SWOON: On the open Sunday evening someone sold 24,000 futures contracts into the least liquid part of the evening. We wrote about it extensively that morning.
Here is an excerpt from Making Sense of Gold Last Night
Together with Friday’s post-payroll plunge, this has been the biggest 2-day drop in gold (in dollar terms) since the March 2020 crash.
However, unlike Friday when gold moved in response to the spike in the dollar and the surge in yields there was no offsetting move in any securities after the futures reopen (the 10Y traded back over 1.30% but the move was orderly) when over $4 billion notional, or some 24,000 contracts were suddenly and furiously dumped in a completely price-indiscriminate manner whose apparent intention was to nuke the entire bid-stack.
A sixteen minute video was recorded focusing specifically on the events of that evening and their implications that can be seen here
To add forensically: There is no measure of responsible risk management that justifies this activity. No matter how you slice it, this was not done in a responsible manner. 24,000 contracts being unloaded in that time frame during the thinnest trading hours of the street, with Japan markets closed caused a much bigger move than would be justified during more liquid hours.
Comparing volumes and move magnitudes
Comparing volumes and move magnitudes
The chart above shows Gold futures at three points in time. The first is when Friday’s payrolls came out. Gold dumped a substantial amount, almost $24 during that time frame on massive volume. Then using a time frame that had similar volumes to the “Flash-Crash”, Gold barely budged. But with volume much smaller than the normal busy sessions, sold into the least liquid time frame, futures dropped almost $100 in 20 minutes. This was not done responsibly. The question now is why not?
Luke Gromen
$4B in notional gold contracts for sale on a Sunday night is not a market, it is a currency intervention.

Most private traders would lose their clients and/or their jobs for executing an order in such a fashion.

So the questions are “Why?” & “Why now”?
 
The following was stated in last week’s report. If you are looking for bigger picture context, it is worth repeating:
Nothing has changed except the price. We have said many times before that Basel 3 makes this a bad market for large hedge funds and a good market for stackers looking for discounts as well as nimble day-traders. Volumes will drop, volatility will increase, and prices will whip more. This is what we saw.
If you wish to own Gold, you are getting a favor. If you wish to day trade Gold, you are getting movement. But if you re a macro long gold futures fund, you are in for a rough time.
Two days later an answer as to who was doing the selling may (or may not) have been found. Although there is no mention of Gold here, the timing is conspicuous. That’s not to say the IMF is the selling source. It is to say they are a supranational entity with ties to Central Banks and the BiS. They also have sold Gold in the past to collateralize SDR activity.
VBL
Do we have a culprit for the Gold crash last week spilling into yesterday? https://t.co/C0uM9ouP4d
TUESDAY-THURSDAY: Now for the good news. Gold stabilized and rotated higher all week afterwards. The rally was impressive and defied several things. Base metals were softer most of the week. The dollar had long stretches of firmness that would under normal circumstances embolden bears.
And strangely, Thursday saw Silver sell off almost 2% at one point. Copper was largely unchanged, so it wasn’t base metals. The Dollar was nowhere that day. And yet Gold held. It is not crazy to think traders are putting on (or taking off) positions related to being long silver and short Gold. This was noted Friday morning.
Silver was down almost 2% at one point but Gold barely budged. The explanation for the behavior can be seen as stagflation type action. This implies Silver is susceptible to an economic slowdown. That may be indeed happening but we believe the market is adjusting to Basel 3 rules. The LBMA is slated to close its non physical positions by year end. And while both metals are subject to the ruling, it is Gold that is a central bank asset.
In fact, the methodical, orderly rally in the price of Gold versus Silver since July 2nd (when Basel 3 was supposed to be enacted) smacks of LBMA or bank covering. This is based on information and experience.
When the spread goes up, Silver is dropping in price relative to Gold.
When the spread goes up, Silver is dropping in price relative to Gold.
FRIDAY: Silver lead Gold Thursday evening higher. Most markets were behaving normally until the Consumer Confidence report came out. The data showed stagflation was the biggest risk. Consumer confidence is one of the few reports that analysts view as actually leading the economy, as opposed to following it. And it showed consumer’s complete loss of confidence to levels not seen in years. Meanwhile, it also showed fears of inflation were very high. Taken together, it just makes it harder for the Fed to taper sooner rather than later. The term to describe this environment is stagflation.
GoldFix Weekly Premium
3. News
1-Middle Class Prosperity Died With the Gold Standard: Deutsche Bank
 
Almost a decade ago, around the 40th anniversary of Nixon ending the gold standard, we observed that it wasn’t just the dollar’s convertibility into gold that died - so did the prosperity of the US middle class, because while income growth for the bottom 90% had soared ever since WWII, it suddenly flat-lined around Nixon’s historic decision in 1971; at the same time the advent of the “fiat standard” ushered in an era of unprecedented wealth for the top 1% whose fortunes have exploded ever since.
Fast forwarding a decade to today, Deutsche Bank’s credit strategist Jim Reid reminds us that this Sunday marks exactly fifty years since Nixon suspended the convertibility of the dollar into Gold.
 
This, Reid goes on, began the era of global fiat money noting that “one of the reasons it has survived so long is that at the start of this period global debt was very low” as his Chart of the Day shows.
Once the “shackles” and policy constraints of gold and sound money were lifted, countries were able to run structural deficits and increase debt to an unprecedented level. Initially, this didn’t have any major systemic implications for many as debt was still historically low. However, the Global Financial Crisis was, in the DB strategist’s view, the limit to how much debt a free market could cope with: “A once-in-a-lifetime global crisis emerged, followed by a Sovereign crisis.”
However, just as things looked bleak for our debt-fueled fiat world, along came QE and central banks with the biggest can-kicking event in history. Since then, G10 central bank balance sheets have increased from just below $5 trillion in 2007 to just below $30 trillion today.
Reid correctly summarizes that “we’ve milked the flexibility of fiat money for 50 years to solve our real time problems and kick many cans down the road” and rhetorically concludes by asking “can we continue to do this?”
- Source Zerohedge
August 15,1971: Nixon Takes US “Temporarily” off Gold
Nixon Ends Bretton Woods International Monetary System
Nixon Ends Bretton Woods International Monetary System
 

Analysis: Why Did We Abandon the Gold Standard?

The Gold standard alone will not bring back middle class prosperity. It is not the main reason why the middle class got destroyed in the last 50 years. But it did set the stage for the demise of the working class by other means.
When Nixon abandoned the Gold standard for the US Dollar, this was a small part in a much more important plan for the US economy. By the time the Gold standard was rescinded, The US economy was no longer able to sufficiently recycle its labor and finished good surpluses to export to Europe and Asia for profit. By the end of the 1960s, the growth in exports was ending while overseas exports to the US began increasing. Those parts of the world had recovered their manufacturing capability and began selling goods to themselves and the US.
Up until the early 1970s, the USA was the largest exporter of finished goods. But that was about to change. Further, the US had taken on significant debt financing the Korean and Vietnam wars.
What ironically became apparent was that deficit spending and financing of trade deficits did work to help the US outgrow the debt. The government learned this by actually overstating the amount of Gold reserves in their possession backing the Dollar. The problem they surmised was; due to Gold’s constraints on the money supply, the US’s ability to outrun the debt by adding to it in “pot-odds fashion” had run into a brick wall. Backing the USD with even less Gold, it seemed, helped solve their problems. So why not abandon it altogether? Enter Paul Volcker.
Paul Volcker served as under secretary of the Treasury for international monetary affairs from 1969 to 1974. He played an important role in President Nixon’s decision to suspend gold convertibility of the dollar on August 15, 1971, which resulted in the collapse of the Bretton Woods system. Volcker considered the suspension of gold convertibility “the single most important event of his career.”
Volcker came to realize the best strategy was to “embrace the deficits”. Why fight the deficits when we can boost them and grow? The US had accumulated massive wealth, why not borrow against it? Instead of fighting the deficits, accommodate them and set things up so we can profit from them. From that point on the deficits started to operate like a giant vacuum cleaner by absorbing other people’s goods and their capital. That arrangement can be understood in part by understanding that as the US trade deficit grew, so did foreign investment in the US. This created a large balanced world. US consumption on one side, and the world’s production on the other.
The world financed our spending. Wall Street profited by making fees off the repatriation of money that came back in investment form. Banks dictated policy.
Powered by the deficit spending, German, Japan, and now China kept creating goods and the US kept buying them. As long as trade flowed in this circular fashion, it gave the impression of balance. Almost 70% of world profits during this period flowed back to the US in capital flows and investment dollars.
We wrote the piece below in 2016 as part of an analysis of China’s Yuan ascending. It is still instructive on how the US secured the Dollar’s dominance when it went off the Gold Standard:
“Then : Gold > USD > PetroDollar 
  1.  Create Gold Demand: 1944 we steer world towards gold for good reason (we have it, and Germany’s lack of Gold was the cause for WW2)
  2. Inflate Debt: 1971 we have to monetize debt to pay for wars in Vietnam and Korea > go off gold standard
  3. Create USD Demand: 1974 cut Arab deal USD for Oil > we sell them military arms, they buy UST”
At the time of agreement of Bretton Woods, 1944, The United States controlled two thirds of the worlds gold and insisted that the act rest on the gold standard. THAT was total power of the world financial system. 2011, U.S. broke, Ben Bernanke says gold is not money. How times have changed.
By securing the US Dollar as world reserve currency, Volcker et al ensured that the dollar would have a perpetual bid under it relative to other fiat currencies. That relationship persists to this day based on a feeling of trust. The world views the US as the safest, most stable haven for its surplus capital. Therefore it has continued to invest in the US its excess profits.
But that is changing. And going back on the Gold standard will not happen. Even if it does, it will not restore Middle Class prosperity. It will be a part of a bigger reset type plan that will protect those fortunate enough to be able prepare for it.
That is why we went off the Gold standard. It is almost certainly why we will never explicitly go back on it. You see, the government only knows the same path and will go further down the rabbit hole. It will abolish cash. Then it will create digital money. It will finally separate the 2 qualities that money has from each other. The money we use will be a medium of exchange only. The money we don’t use, and few have, will be a store of value. But they will not be the same money. Stores of Value will be what they always have been. Try to hang onto yours whatever those may be.
2-JP Morgan Just Said Bitcoin is a Buy, Should You Believe Them?
 
On Wednesday, when both bitcoin and ethereum had soared well over 50% from their recent lows in just a few weeks, ZH took JPMorgan to task on twitter pointing out that it was “so strange: when crypto was dropping, JPM had a report literally every other day observing how momentum collapsed and it is going even lower. Shockingly, not a single report from JPM with bitcoin up 50% in 3 weeks.”
Elaborating on his view that institutional buying of crypto has reversed and after several months of muted activity has once again spiked, Panigirtzoglou writes that “the sharp rebound of crypto markets over the past three weeks caught most investors by surprise” - actually what he probably means is that it caught JPM and those who believed JPM by surprise - “raising questions about the drivers.”
So, rushing to goalseek said “drivers”, the same ones we have repeated week after week - that despite the muted price action, institutions had in fact been loading up - JPM now admits as much writing that “in futures we see a significant impulse as shown in Figure 5. Figure 5 depicts our assessment of the net positioning change by investors in CME Bitcoin and Ethereum futures (in number of contracts to remove price effects). Not only have our position proxies based on CME futures been reversing previous declines, they are also making new record highs for both bitcoin and ethereum.”
But while institutional buying was to be expected, one notable reversal was the activity of CTAs, where according to the JPM quant, “momentum traders such as CTAs have likely amplified recent price increases. Not only has the decay in momentum signals stopped, but is being reversed inducing positioning built up by momentum traders.”
Next, JPM charts its sestimate for shorter-term and longer-term momentum signals in bitcoin. Here Panigirtzoglou notes that he had argued previously that “the failure of bitcoin to break above the $60k threshold would see momentum signals turn mechanically more bearish and induce further position unwinds, and that this had likely been a significant factor during the previous months correction by inducing CTAs and other momentum-based investors to cut positions.” However, now that CTA’s have extracted as much profit as they could, these bitcoin momentum signals are now rising, especially the shorter look-back period momentum signal, which according to Figure 6 has been flipping from negative to positive territory. Typically, the Greek quant explains, “this is when momentum traders’ impact is mostly felt as they are forced to exit short positions and start building up long positions.”
 
One final reason why Panigirtzoglou had been bearish - until now - is because futures backwardation in cryptos, a bearish signal for bitcoin and crypto markets more generally, had again reappeared in crypto after dominating for most of 2018 according for most of the previous four months.
Putting all this together, Panigirtzoglou summarizes his bearish capitulation as follows:
“there are clear signs of demand improvement in futures markets pointing to rising institutional demand for crypto. Momentum traders such as CTAs have likely amplified recent moves as the shorter lookback period momentum signals shifted from negative to positive territory. Typically this is when momentum traders’ impact is mostly felt as they are forced to exit short positions and start building up long positions.- Source
 
Analysis: Be Careful
  1. Write multiple “research” reports to influence the price lower for friends and your own desks to buy. Separate the weak hands from their wealth. Shut down the Chinese “dirty” miners in doing so.
  2. Then write another report so the friends can sell the inflated asset back to the Chinese and domestic retail.
VBL
one thing.. when a bank recommends something its for 1 of 3 reasons

1- they believe it now
2- they believed it for the past 2 months,are really looking for exits for their bigger clients
3- they need to cover themselves.

the trick is knowing which reason.. and thats unknowable https://t.co/TmpzryGpOu
4. Technicals
Report Excerpts Courtesy MoorAnalytics.com
Gold
Shorter Term: We have attained $49.6 of the higher trade warned about since the close of 8/10 at $1,731.7, and we left yet another bullish reversal below today. Decent trade below $1,755.4 will negate this. I also warned in the Post Market Synopsis that today had a good likelihood of seeing range expansion—we saw an 80% increase in range over that of yesterday.
Gold Weekly
Gold Weekly
On a longer timeframe : The trade below $1,879.3 brought in $201.4 of pressure. On 6/14 we left a large bearish reversal above that warned of pressure for days/weeks—we have seen $192 of this so far. These are ON HOLD.
 
5. Tools
Best of the Week’s Educational Pieces.
Crypto Crackdown: How Gary Gensler and the Infrastructure Bill Are Looking to Tame the "Wild West"
Crypto Crackdown: How Gary Gensler and the Infrastructure Bill Are Looking to Tame the "Wild West"
Sunday Mock Trading: 3p.m.- 5p.m. ET
VBL
Sunday:
You will know more about spreads after this weekend than anyone you know- Promise
SPREADS
OPTIONS
MockTrading https://t.co/HFs8ACgn4x
6. Charts
Gold
 
Silver
 
US Dollar
 
10 Year Bond Yield
 
Bitcoin
 
7. Calendar
Some of the upcoming week’s key data releases and market events
MONDAY, AUG. 16
  • 8:30 am Empire State manufacturing index Aug.
TUESDAY, AUG. 17
  • 8:30 am Retail sales July
  • 8:30 am Retail sales ex-autos July
  • 9:15 am Industrial production July
  • 9:15 am Capacity utilization July
  • 10 am Business inventories June
  • 10 am NAHB home builders’ index Aug.
WEDNESDAY, AUG. 18
  • 8:30 am Building permits (SAAR) July
  • 8:30 am Housing starts (SAAR) July
  • 2 pm FOMC minutes
THURSDAY, AUG. 19
  • 8:30 am Initial jobless claims (regular state program) Aug. 14
  • 8:30 am Continuing jobless claims (regular state program) Aug. 7
  • 8:30 am Philadelphia Fed manufacturing index Aug.
  • 10 am Index of leading economic indicators July
FRIDAY, AUG. 20
  • None scheduled
Main Source: MarketWatch
8. Disclaimer
Disclaimer : Nobody is telling you to do anything here. Anybody who tells you to do something without first intimately knowing your personal situation is irresponsible at best and manipulative at worst. Worse, anyone who acts on other people’s opinions without first doing an inventory of their own situation shouldn’t be surprised if they lose money.
Don’t miss out on the other issues by VBL
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