FXEMPIRE
All

Another Repo Market Liquidity Injection for Gold Bulls to Cheer

Last Thursday, the New York Fed added more than $80 billion in fresh temporary liquidity to the financial markets. Move over folks, nothing to see here – but what does it mean for gold prices?
Arkadiusz Sieroń
Another Repo Market Liquidity Injection for Gold Bulls to Cheer

Repo Crisis Is Not Over

Last week on Thursday, the New York Fed added $83.1 billion in temporary liquidity to financial markets. And banks’ demand for liquidity flared up again on Tuesday. If you haven’t heard of it, don’t worry – almost no one did. After all, journalism is about covering important stories… with a pillow!

The Fed not only injected some fresh liquidity, but also noted that it “may keep adding temporary money to markets for longer than policy makers had expected in September,” at least through April. So much for the normalization of monetary policy…

Please look at the chart below. It shows the Fed’s balance sheet in 2019. Although the U.S. central bank has managed to shrink its assets a bit compared to the peak of $4.516 trillion from early 2015, the quantitative tightening has ended quickly.

Chart 1: Fed’s balance sheet in 2019 in trillion of US dollars.

Last September, in a response to the repo crisis, the Fed started again buying assets (but do not call it quantitative easing, this is, wink, wink, something different). Actually, the recent liquidity injections have already reversed all the tightening that occurred earlier in 2019. The Fed added more than $400 billion to its balance sheet, rasising it from the lows of $3.76 trillion up to $4.165 trillion at the end of December. And Thursday’s move will add even more to the Fed’s balance sheet!

What is important is that the liquidity shortage in the U.S. repo market was not a one-off event, but that it has become a structural problem. As the December report from the Bank of International Settlements explains,

U.S. repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (eg hedge funds) via Treasury repos appears to have compounded the strains of the temporary factors.

To simplify, there is too little cash and too many government bonds. Well, traders can thank President Trump who has increased significantly the fiscal deficit. As the Congressional Budget Office estimated last week, the federal deficit rose 12 percent in the first quarter of fiscal year 2020 compared to the same period last year. Larger deficit means more Treasuries coming into the market, putting an upward pressure on interest rates.

Implications for Gold

The additional cash injections from the Fed are fundamentally positive for the gold market. First, they act similarly to an additional interest rate cut. Second, they suggest that the financial market is less liquid and healthy that it might seem at first sight. They show that the liquidity shortage has not ended – and that it could trigger an important turmoil in 2020. Gold should shine then!

And let’s not forget about the crazy fiscal policy. So, it might be the case that 2020 will be, after all, better for the gold prices than we previously thought. We expected less insane fiscal policy, but with such huge deficits, the macroeconomic outlook for gold looks more optimistic. However, it’s a bit too early to radically change our view – we will return to this issue, as we always do, in the new edition of the Gold Market Overview. Stay tuned!

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits – Effective Investments Through Diligence and Care

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Trading Alerts.

Don't miss a thing!
Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US