Important articles (IMHO) from Jeffrey Snider, Alhambra Partners into the Mechanics of Gold as Collateral.

Gold as Collateral is evidently a key driver of the price of gold, but infrequently discussed here – only by Plunger I think – probably because we focus on charts.

Were you to read the articles below, and perhaps follow the links & (gold related) tags therein, you’ll learn about this opaque but key gold fundamental, and that may help better inform your trading.

 

  1. Sunday Gold Fix – The Basics of Leasing (May 2013):

http://www.alhambrapartners.com/2013/05/28/sunday-gold-fix-the-basics-of-leasing/

“The most common question I receive about gold relates to the means through which an increase in leasing/lending activity is negative for gold prices. It appears that the mechanism by which this is accomplished is unclear and counterintuitive.

By all accounts, an increase in the demand for gold as collateral to obtain “cash” should be positive for gold since it amounts, on the surface, to a rise in demand for gold. But that is not actually what happens, and, in fact, the activity is all on the supply side.”

 

  1. We Have Seen Gold Prices Act Like This Before (April 2013):

http://www.alhambrapartners.com/2013/04/15/we-have-seen-gold-prices-act-like-this-before/

“…despite this diminished status, gold holds a property in banking that makes it especially valuable (pun intended) – it is universal. It crosses national boundaries easily. In the modern financial world of short-term liabilities and wholesale money, this universality can come in handy. A US$ mortgage bond can obtain a bank wholesale repo funding only in US$’s, but gold can obtain “repo” funding in any currency trading.

That means in times of extreme stress, gold acts like a universal liquidity stopgap – when all else fails, repo gold. The operational reality of a gold repo is a gold lease, charged at the forward rate (GOFO). In terms of market mechanics, a dramatic increase in gold leasing is seen as a massive increase in supply on the paper markets.

When we match the price of gold against these stressed periods, they coincide perfectly. In other words, whenever collateralized lending has become problematic banks appeal to the universal collateral. Unfortunately, that looks like gold selling to the uninitiated.

 

  1. It’s Not Actually Inconsistent (Nov 2016):

http://www.alhambrapartners.com/2016/11/11/its-not-actually-inconsistent/

“Just as gold had risen recently, it was smacked down again the past few days; from $1,304 Tuesday to $1,255 at the AM fix today, and down big again to $1,236 at the PM. That’s almost $70 in just two sessions.

I have to believe that the resulting action across these two trading days is linked to the disorderly selling in bonds, especially the massive irregularities for interest rate swap trading. What the UST market did was show very large margin calls that were likely good for more than just the UST market. If we are talking about derivatives, that would mean UST’s as collateral, and therefore a good bet that gold was in play as a last-resort funding method (highly negative for gold prices).

 

  1. COT Blue: Bonds Are Not Tuned In To The Mainstream Channel (Dec 2017):

http://www.alhambrapartners.com/2017/12/05/cot-blue-bonds-are-not-tuned-in-to-the-mainstream-channel/

“….And it’s not just copper where we detect China’s “dollar” fingerprints. Gold, for instance, has been trading far more correlated with CNY than even JPY, a remarkable change given how closely gold prices tracked the yen exchange at least until July (which is when the last downturn in UST yields materialized, the one that matched perfectly if inversely CNY’s gold-correlated rocket ascent).”

GOLD-CNY & GOLD-JPY

 

  1. Chart of the Week: [Gold as] Collateral (Dec 2017):

http://www.alhambrapartners.com/2017/12/08/chart-of-the-week-collateral/

GOLD-REPO & GOLD-CNY

 

In view of the above, these are the channels for GOLD I’m looking at going into the New Year.

 

 

Good luck…