Gold Repatriation from FRBNY continues at high pace in July 2016

Gold repatriation continues unabatedly.

 

Federal Debt Held by Foreigners Vs. 10 Year Yield

When foreigners cut their positions in U.S. debt, the 10 year yield will go up as bonds will decrease in value.

Credit Risk: 2 Year Vs. LIBOR Vs. Fed Funds Rate

The LIBOR rate is a benchmark rate on interbank loans worldwide. It is the amount banks charge each other to borrow money. The counterpart to this is the Fed Funds Rate, which is risk-free.

When both rates diverge from each other, we can say that this is a warning sign and leading indicator for credit risk. It also means there isn't enough liquidity. This is reflected in the higher cost of borrowing from banks.

The Fed has cut rates since the financial crisis of 2008, but LIBOR doesn't follow and is even rising now in 2016, especially since the end of QE3 in 2015. This same thing that happened in 2008 will happen in 2016-2017. LIBOR diverged from the Fed Funds Rate and the Federal Reserve will need to come in and initiate QE4 or negative interest rates to bring down the LIBOR rate and provide liquidity.

The Fed funds rate tends to move with the 2 year treasury as well. The probability of a rate hike can be monitored here.

Eurodollar futures lead the fed funds rate.

Another similar indicator you can follow is the TED spread. The TED spread is the spread between 3-Month LIBOR and the 3-Month treasury bill based on US dollars. VIX is correlated to TED spread.

 

The FRA - OIS spread shows the willingness of banks to lend to each other.

Another indicator of credit risk is the bank term funding program to prop up failing regional banks.

U.S. Mint Sales Plunging

Houston, we have a problem. Silver sales have plunged (red chart). It will be interesting to see the demand and supply figures from the Silver Institute...

FRBNY gold repatriation accelerating in June 2016

FRBNY gold repatriations have never gone down like this without triggering a recession. Another 30 tonnes of gold were repatriated in June 2016.

Q2 2016 Gold Demand Subdued

A bit of disappointing news from the World Gold Council today. Gold demand dropped 20% from last quarter to 1050 tonnes while gold supply was flat at 1145 tonnes. So that's why gold did so poorly in the previous months.

So we turned from a 150 tonnes deficit to a surplus of 100 tonnes. The third quarter however should be more positive due to Brexit.

GDP Vs. Oil

One obvious leading indicator for lower oil prices is GDP growth. When the economy suffers a recession with low GDP growth, demand for oil will diminish.

As the blue line goes down, so does the red line. 2015-2016 has seen a drop in GDP growth, so oil will not be doing well going forward. GDP is also correlated to oil production as seen on the chart below.

Note: this is also why gold and oil will not always go into the same direction. We can have a recession with oil going down, while gold will be a safe haven and go up in value (due to a higher misery/fear index). To bank on that outcome you could buy gold mining shares (lower oil production costs, higher gold revenue).

Leading indicators suggest recession coming

With the stock market at all time highs, backed by strong July jobs numbers where 255000 jobs were added, let's contemplate on what to expect in the coming months. Jobs numbers are considered to be a lagging indicator, so it doesn't reflect the actual situation. So I will be going over the leading indicators in this article.

First of all, each month the St. Louis Fed reports the leading index on its site. The leading indicator for June trended down. So we can predict that the economy is not doing that well. The coincident indicator is trending down as well. So the actual situation isn't that good either.

I will briefly discuss the following leading indicators and there are quite a lot of them: bond yields, ISM manufacturing PMI, lumber prices, building permits, trade deficit, consumer sentiment, art prices, employment to population ratio, fed funds rate, debt to GDP, corporate earnings, GDP output gap, yield curve, credit spread, capacity utilization, business inventory to sales ratio.

You can find the analysis here.