Share:

Recall the liquidity event observed in March of 2020. Although gold ended up dropping less than the broad markets, it was not immune under stressed liquidity conditions. Once market concerns subsided, gold rebounded sharply along with other hard assets like silver and most commodities.

This tells us that investors sold their gold because they had to, not because they wanted to.

Recently, gold has fallen below its key support level of $1765 (Q4 2020 lows). As seen below, gold is nearing pre-pandemic levels in the $1700 range (yellow). 

gold chart

More leverage, greater unwinding 

This is exactly what liquidity issues are made of - forced selling of highly liquid assets to bolster cash buffers and even meet margin calls. Although markets are not in absolute turmoil as of now, gold is sending a message that liquidity concerns are back. 

It’s important to remember the financial system is more leveraged today than ever before. Margin debt is at all-time highs, which amplifies liquidity concerns when they arise. Based on this backdrop of tremendous leverage in financial assets, we can expect an exaggeration of both market highs and lows. 

Why liquidity concerns now? 

US Treasury yields have been rising sharply as of late, due to higher inflation expectations and the presumption that government spending will remain high. It was only a matter of time before sharply rising yields created liquidity concerns given today’s highly leveraged global economic system. 

Therefore, it will be crucial for investors to keep a close eye on the 10-year yield and gold. A great buying opportunity is present in the precious metals space when we consider that central banks will not allow yields to rise indefinitely. Physical precious metals and mining shares remain at bargain prices, given the macroeconomic backdrop.

The 10-year yield is sitting around 1.5% in the midst of this ongoing bond market selloff. Note in the chart below, how the 1.5% range marks a test of key previous structure:    

10year yield

The Fed will be under pressure to act

It’s possible the 10-year yield has naturally peaked already, but we cannot be sure. If not, the Fed will be under pressure in its next meeting to intervene. Many economists, including Danielle Dimartino Booth of Quill Intelligence, are suggesting that the Fed may be forced to shift their QE purchases toward the long end of the yield curve to halt the rise in Treasury yields. 

Remember, the Fed and other global central banks need to keep real interest rates negative or else the cost of refinancing government and private sector debts will be too great a burden. Their goal is to inflate away the government’s debt - requiring inflation levels to remain higher than long-term rates. Without negative real rates, it’s impossible to keep the financial economy in a constant expansion mode.

Currently, the Fed’s QE program is focused on buying the short-end of the yield curve. If indeed the FOMC decides to purchase longer duration securities, it will be de-facto implementing “yield curve controls.” This would bring the US financial system one step closer to a full “Japanification.” 

Opportunity 

Whether or not the top of the 10-year yield comes naturally or takes the FOMC action, the buying opportunity in precious metals is not one to be overlooked. 

As central banks drive real rates into negative territory, gold’s case as an inflation hedge and safe-haven insurance asset is only strengthened in the long run. 

Precious metals investors should be thankful for the opportunity to accumulate at prices equivalent to pre-pandemic levels - before the massive government interventions of 2020 had even taken place. 

Warren Buffett has said this many times - be fearful when others are greedy, greedy when others are fearful. What better time could there be to accumulate precious metals assets than when others are under forced selling pressure!

Share: Feed news

This material is based upon information that Bytown Capital INC considers reliable and current, Bytown Capital can and does not assure that this material is accurate or complete. As such it should not be relied upon. Bytown Capital and its staff do not act as personal investment advisors for any specific individual. Bytown Capital does not advocate the purchase or sale of any security listed on any exchange.

Follow us on Telegram

Stay updated of all the news

Join Telegram

Recommended Content


Follow us on Telegram

Stay updated of all the news

Join Telegram

Recommended Content

Editors’ Picks

USD/JPY tumbles toward 132.00 after Japan confirms 'stealth intervention'

USD/JPY tumbles toward 132.00 after Japan confirms 'stealth intervention'

USD/JPY is sinking toward 132.00 in the Tokyo open as Japan's Finance Ministry confirmed a  stealth intervention in the forex market. The BoJ conducted an intervention in the yen on instructions from the Finance Ministry. Focus shifts to Fed's Powell. 

USD/JPY News

AUD/USD grinds above 0.6860 key support on softer Aussie trade surplus, RBA, Fed’s Powell eyed

AUD/USD grinds above 0.6860 key support on softer Aussie trade surplus, RBA, Fed’s Powell eyed

AUD/USD remains sidelined around the intraday high near 0.6890, portraying the typical pre-data anxiety, as the Aussie pair traders await the Reserve Bank of Australia’s (RBA) monetary policy meeting announcements on early Tuesday.

AUD/USD News

Gold struggles below $1,900 as Federal Reserve Chairman Jerome Powell’s speech looms

Gold struggles below $1,900 as Federal Reserve Chairman Jerome Powell’s speech looms

Gold price (XAU/USD) treads water around $1,865, following a corrective bounce off the one-month low, as the bullion traders await Federal Reserve (Fed) Chairman Jerome Powell’s speech amid hawkish bias over the United States central bank’s next move.

Gold News

Will Binance Coin price face a drawdown as Binance suspends USD bank transfers from February 8?

Will Binance Coin price face a drawdown as Binance suspends USD bank transfers from February 8?

Binance is the biggest cryptocurrency exchange in the world. It also emerged as a key player in the crypto industry owing to its initiatives following the FTX collapse in November 2022.

Read more

Reserve Bank of Australia Preview: No choice but to keep hiking rates Premium

Reserve Bank of Australia Preview: No choice but to keep hiking rates

The Reserve Bank of Australia (RBA) will announce its monetary policy decision on February 7, with the Board expected to pull the trigger by another 25 basis points (bps). 

Read more

Majors

Cryptocurrencies

Signatures