The Fed, Treasury and liquidity

A reader asked me to please explain why liquidity is rising despite the Fed hiking rates and shrinking its balance sheet (QT) by more than $1.7 trillion.

We will try to avoid the technical jargon and stick to the basics. But it’s not always an easy concept to explain or grasp.

What is liquidity?

Liquidity is not the same as money. It is more closely related to other side of the balance sheet and is best described as the “ease of financing” or availability of credit in financial markets. It includes access to credit from the domestic banking system and bond markets, as well as international financial markets.

In Reminiscences of a Stock Operator Jesse Livermore describes the operation of the Money Post on the floor of the exchange, where brokers borrowed money overnight to finance their stock operations. We have included an excerpt where he describes the impact of tight liquidity leading up to the crash of 1907. It is worth reading: The Money Tree | Jesse Livermore

How do we measure liquidity?

We use several indicators to measure liquidity in financial markets. These include:

Commercial Bank Reserves at the Fed

Commercial bank reserves spiked up in March 2023 after the Silicon Valley Bank (SVB) debacle, when the Fed introduced the Bank Term Funding Program (BTFP). Reserves continued to climb steeply until February 2024, when inflation reared its head, before falling sharply in March and April during the tax payment season.

Commercial Bank Reserves at the Fed

Chicago Fed Financial Conditions Index

The Chicago Fed Financial Conditions Index is an excellent measure of financial market liquidity, though data is normally a week behind that of bank reserves.

Chicago Fed Financial Conditions Index

Moody’s Baa Corporate Bond Spread

Moody’s Baa corporate bond spreads are a good indicator of credit availability in bond markets. The spread measures the premium that low investment grade corporate borrowers have to pay over the risk-free Treasury rate.

Moody's Baa Corporate Bond Spreads


We even use Bitcoin as the “canary in the coal mine”. Cryptocurrencies are the most liquidity-sensitive assets in financial markets and normally the first to show signs of stress.

Bitcoin climbed steeply from November ’23 until early March ’24 before stalling in March-April. Its rise in May heralded a recovery in financial market liquidity.


How the Fed and Treasury influence liquidity

The most obvious way that the Fed influences liquidity is by purchasing or selling Treasury and Agency securities in financial markets.

In April 2020, the Fed purchased almost $3 trillion in securities, expanding its balance sheet (blue below). We can also see that Treasury took advantage of these Fed purchases, issuing $1.4 trillion more in securities than it needed to fund current expenditure. The surplus shows in the TGA account at the Fed (red below) and had the effect of partially offsetting the Fed’s injection of liquidity.

Chicago Fed Financial Conditions Index

In 2021, Treasury slowed their issuance of securities, as they neared the debt ceiling, and started to draw down on their TGA account at the Fed (red above). This amplified Fed QE (blue) as it also injected liquidity into financial markets. The Fed did their best to offset this by borrowing in financial markets through overnight reverse repo operations (green above) mainly from money market funds which normally invest in T-Bills and other short-dated securities.

In late 2022, the Fed announced it was going to gradually reduce its balance sheet as securities matured. The blue area below zero is referred to as quantitative tightening, or “QT”. Since then, total assets at the Fed have shrunk by roughly $1.7 trillion. Treasury also increased net issuance and started to rebuild their TGA account balance (red) above. But the Fed was again able to offset this by lowering rates offered on reverse repo and running its RRP liabilities (green) down from almost $2.4 trillion to just $371 billion at present.

The net impact of the combined operations is shown by the blue line below. The massive combined monetary easing lasted until early 2022, when tightening commenced. But tightening ended after the March ’23 banking (SVB) crisis, with the Fed injecting liquidity to prop up financial markets until March ’24. By March, inflation was starting to rebound and the Fed may have realized that they had over-egged the pudding.

Chicago Fed Financial Conditions Index

The abrupt fall in liquidity in March-April was evident not only in bank reserves but in Bitcoin and in the stock market.


Liquidity is again rising — as shown by the the rise in Bitcoin and the fall in Chicago Fed Financial Conditions Index. Stocks and bonds are likely to rise as a result.


There are further factors that affect financial market liquidity in the US. This can include monetary easing by foreign central banks. The PBOC may inject liquidity into financial markets in Beijing or Hong Kong but the net result may ease financial conditions in New York if US T-Bills offer higher rates of return than the equivalent security in China.

We have also seen Treasury Secretary Janet Yellen change the mix of Treasury issuance in order to reduce the impact on financial market liquidity. Reducing the amount of longer maturity Treasury notes and bonds and increasing issuance of shorter-term T-Bills also helped to boost liquidity. T-Bills are the most liquid asset on the planet, with almost infinite demand. Holding a 3-month T-Bill is like holding Dollars — they have no default or rate risk — but you get a 5.0% return on top. So issuing more T-Bills has limited impact on short-term rates, while issuing less 10-year Notes , for example, will lower long-term yields when demand exceeds supply.


The Money Post | Jesse Livermore

Jesse Livermore

Jesse Livermore made several million Dollars by shorting stocks ahead of the crash of October 1907. In Reminiscences of a Stock Operator he describes the impact on financial markets when liquidity dries up:

From the latter part of September on, the money market was megaphoning warnings to the entire world. But a belief in miracles kept people from selling what remained of their speculative holdings. Why a broker told me a story the first week of October that made me feel almost ashamed of my moderation.

You remember that money loans used to be made on the floor of the Exchange around the Money Post. Those brokers who had received notice from their banks to pay call loans knew in a general way how much money they would have to borrow afresh. And of course the banks knew their position so far as loanable funds were concerned, and those which had money to loan would send it to the Exchange. This bank money was handled by a few brokers whose principal business was time loans. At about noon the renewal rate for the day was posted. Usually this represented a fair average of the loans made up to that time. Business was as a rule transacted openly by bids and offers, so that everyone knew what was going on. Between noon and about two o’clock there was ordinarily not much business done in money, but after delivery time—namely, 2:15 p.m.—brokers would know exactly what their cash position for the day would be, and they were able either to go to the Money Post and lend the balances that they had over or to borrow what they required. This business also was done openly.

Well, sometime early in October the broker I was telling you about came to me and told me that brokers were getting so they didn’t go to the Money Post when they had money to loan. The reason was that members of a couple of well known commission houses were on watch there, ready to snap up any offerings of money. Of course no lender who offered money publicly could refuse to lend to these firms. They were solvent and the collateral was good enough. But the trouble was that once these firms borrowed money on call there was no prospect of the lender getting that money back. They simply said they couldn’t pay it back and the lender would willy-nilly have to renew the loan. So any Stock Exchange house that had money to loan to its fellows used to send its men about the floor instead of to the Post, and they would whisper to good friends, “Want a hundred?” meaning, “Do you wish to borrow a hundred thousand dollars?” The money brokers who acted for the banks presently adopted the same plan, and it was a dismal sight to watch the Money Post. Think of it!

Why, he also told me that it was a matter of Stock Exchange etiquette in those October days for the borrower to make his own rate of interest. You see, it fluctuated between 100 and 150 per cent per annum. I suppose by letting the borrower fix the rate the lender in some strange way didn’t feel so much like a usurer. But you bet he got as much as the rest. The lender naturally did not dream of not paying a high rate. He played fair and paid whatever the others did. What he needed was the money and was glad to get it.

Things got worse and worse. Finally there came the awful day of reckoning for the bulls and the optimists and the wishful thinkers and those vast hordes that, dreading the pain of a small loss at the beginning, were now about to suffer total amputation—without anaesthetic. A day I shall never forget, October 24, 1907.

Reports from the money crowd early indicated that borrowers would have to pay whatever the lenders saw fit to ask. There wouldn’t be enough to go around. That day the money crowd was much larger than usual. When delivery time came that afternoon there must have been a hundred brokers around the Money Post, each hoping to borrow the money that his firm urgently needed. Without money they must sell what stocks they were carrying on margin—sell at any price they could get in a market where buyers were as scarce as money—and just then there was not a dollar in sight.

My friend’s partner was as bearish as I was. The firm therefore did not have to borrow, but my friend, the broker I told you about, fresh from seeing the haggard faces around the Money Post, came to me. He knew I was heavily short of the entire market.

He said, “My God, Larry! I don’t know what’s going to happen. I never saw anything like it. It can’t go on. Something has got to give. It looks to me as if everybody is busted right now. You can’t sell stocks, and there is absolutely no money in there.”

“How do you mean?” I asked.

But what he answered was, “Did you ever hear of the classroom experiment of the mouse in a glass-bell when they begin to pump the air out of the bell? You can see the poor mouse breathe faster and faster, its sides heaving like overworked bellows, trying to get enough oxygen out of the decreasing supply in the bell. You watch it suffocate till its eyes almost pop out of their sockets, gasping, dying. Well, that is what I think of when I see the crowd at the Money Post! No money anywhere, and you can’t liquidate stocks because there is nobody to buy them. The whole Street is broke at this very moment, if you ask me!”

It made me think. I had seen a smash coming, but not, I admit, the worst panic in our history. It might not be profitable to anybody—if it went much further.

Finally it became plain that there was no use in waiting at the Post for money. There wasn’t going to be any. Then hell broke loose.

The president of the Stock Exchange, Mr. R. H. Thomas, so I heard later in the day, knowing that every house in the Street was headed for disaster, went out in search of succour. He called on James Stillman, president of the National City Bank, the richest bank in the United States. Its boast was that it never loaned money at a higher rate than 6 per cent.

Stillman heard what the president of the New York Stock Exchange had to say. Then he said, “Mr. Thomas, we’ll have to go and see Mr. Morgan about this.”

The two men, hoping to stave off the most disastrous panic in our financial history, went together to the office of J. P. Morgan & Co. and saw Mr. Morgan. Mr. Thomas laid the case before him. The moment he got through speaking Mr. Morgan said, “Go back to the Exchange and tell them that there will be money for them.”


“At the banks!”

So strong was the faith of all men in Mr. Morgan in those critical times that Thomas didn’t wait for further details but rushed back to the floor of the Exchange to announce the reprieve to his death-sentenced fellow members.

Then, before half past two in the afternoon, J. P. Morgan sent John T. Atterbury, of Van Emburgh & Atterbury, who was known to have close relations with J. P. Morgan & Co., into the money crowd. My friend said that the old broker walked quickly to the Money Post. He raised his hand like an exhorter at a revival meeting. The crowd, that at first had been calmed down somewhat by President Thomas’ announcement, was beginning to fear that the relief plans had miscarried and the worst was still to come. But when they looked at Mr. Atterbury’s face and saw him raise his hand they promptly petrified themselves.

In the dead silence that followed, Mr. Atterbury said, “I am authorized to lend ten million dollars. Take it easy! There will be enough for everybody!”

Then he began. Instead of giving to each borrower the name of the lender he simply jotted down the name of the borrower and the amount of the loan and told the borrower, “You will be told where your money is.” He meant the name of the bank from which the borrower would get the money later.

I heard a day or two later that Mr. Morgan simply sent word to the frightened bankers of New York that they must provide the money the Stock Exchange needed.

“But we haven’t got any. We’re loaned up to the hilt,” the banks protested.

“You’ve got your reserves,” snapped J.P.

“But we’re already below the legal limit,” they howled.

“Use them! That’s what reserves are for!” And the banks obeyed and invaded the reserves to the extent of about twenty million dollars. It saved the stock market. The bank panic didn’t come until the following week. He was a man, J. P. Morgan was. They don’t come much bigger.

Acknowledgement Reminiscences of a Stock Operator, Edwin Lefevre

S&P 500 retreats, along with crude and precious metals

Treasury yields are trending upwards, as inflation proves persistent, but also driven by the scarcity of foreign buyers in the UST market. Rising Japanese long-term yields, the result of a weak Yen and higher inflation, make Treasuries less attractive to Japanese institutional investors. Geopolitical tensions have also motivated the BRICS, led by China, and the Saudis, to reduce exposure to the Dollar and increase their gold reserves.

10-Year Treasury yields are retracing to test support at 4.5%. Rising Trend Index troughs indicate upward pressure and respect of support would confirm another test of 4.7%.

10-Year Treasury Yield

Liquidity in financial markets is improving, however, with commercial bank reserves restoring almost half of the amount lost during the April tax payment season.

Commercial Bank Reserves at the Fed


The S&P 500 is undergoing a retracement, likely to test support at 5200. Declining Trend Index peaks warn of secondary selling pressure, with the strong primary up-trend unlikely to be threatened.

S&P 500

The equal-weighted S&P 500 fared slightly better, finding short-term support at 6600. But a steeper Trend Index decline warns of stronger selling pressure. Breach of 6600 would warn of a test of primary support at 6450.

S&P 500 Equal-Weighted Index

Gold and the Dollar

The Dollar index twice respected resistance at 105 and another test of the key 104 level is likely. Breach of 104 and the rising trendline would warn of a reversal to test the band of primary support (red) between 100 and 101.

Dollar Index

Gold made a weak recovery above support at $2330 per ounce. The Trend Index warns of significant selling pressure and another test of primary support at $2280 is likely. Domestic Chinese demand remains strong, however, with the Shanghai Gold Exchange Au99.99 contract trading at an equivalent of $2373 per ounce.

Spot Gold

Silver also shows selling pressure, with a lower peak on the Trend Index. Another test of support at $30 per ounce is likely.

Spot Silver

Crude Oil

Nymex light crude is again testing support at $78 per barrel after a strong inventory build reported by the EIA. Follow-through below $77 would signal another decline, with a likely test of primary support at $68.

Nymex Light Crude

Crude oil and petroleum inventories are rebuilding after a decline in early 2024.

Crude Oil & Refined Petroleum Products Inventory

The managed money short position in Brent Crude futures is at its highest level since 2020, suggesting a bearish outlook for crude oil. But beware of a surprise OPEC+ production cut in the lead-up to the November US elections.

Crude Oil Short Positions


The key variable in our short-term outlook is financial market liquidity. That is improving and should support stock prices.

In the long-term, lower crude oil prices are expected to ease inflationary pressures and allow the Fed to maintain easy monetary policies. But the Treasury market is susceptible to selling by foreign investors — which should maintain upward pressure on long-term yields.

Lower inflation and higher long-term yields are bearish for precious metals. But these are outweighed by increased central bank buying due to geopolitical tensions and collapse of the Chinese real estate market. This has left domestic investors shifting to Gold as an alternative store of value.

We remain short-term bullish on stocks. Long-term, we prefer critical materials needed for the energy transition — especially lithium, copper and uranium; heavy electrical industry; and defensive sectors with strong dividends.


In Gold we Trust

Rising demand for gold and silver reflect the failure of central banks to maintain price stability and efficient functioning of credit markets. Private investor mistrust of fiat currencies was historically an emerging market problem, with countries like India and China holding large private savings in the form of precious metals or real estate.  But now growing US fiscal problems have caused mistrust to spread to the global reserve currency as central banks reduce exposure to the Dollar and increase purchases of gold bullion.

Stocks & Treasuries

The S&P 500 respected support at 5250, the short harami candle indicating uncertainty. Breakout above Thursday’s high would confirm our target of 5500.

S&P 500

Ten-year Treasury yields are testing resistance at 4.5% but the short candle and weak close look tentative and respect is likely.

10-Year Treasury Yield

Gold & Silver

Gold is likely to test support at $2,300 per ounce. Respect is likely and would confirm that the up-trend is intact.

Spot Gold

Silver is similarly poised to test support between $29 and $30 per ounce. Respect of support is again likely to confirm the up-trend.

Spot Silver

Gold Demand from the East

Ronnie Stoeferle — managing director of Liechtenstein-based asset manager Incrementum AG and author of the annual In Gold We Trust report — says that 70% of gold demand is now from the East. Mainly China and India but supported by buying in Vietnam, Thailand and lately Japan.


Jeff Currie — chief energy strategist at the Carlyle Group and former Global Head of Commodities Research at Goldman Sachs — says that central banks are now recycling commodity surpluses into Gold, not Dollars. When prices are high, crude oil producers generate trade surpluses which they historically have invested in Dollar-based assets — mainly US Treasuries — but are now investing in gold.

The Saudis and Russia are increasingly selling crude oil and gas in Yuan and Rupees which they then use to import goods from China and India. Any remaining surplus is then used to purchase gold as they do not want to hold the currencies in their official reserves. Physical gold is flowing from West to East, to meet increased demand, and driving up prices.

The change has caused a dramatic divergence between gold (brown below) and real long-term interest rates, represented by the TIPS yield (blue) below.

Gold & TIPS Yield

Source: Gainesville Coins

The scale of increased demand and its impact on gold prices is not hard to imagine when one considers that global crude oil production is more than 13 times the Dollar value of total gold output.

USD Value of Gold & Crude Oil Production

Source: FFTT

Central Bank Purchases

China and India are ranked among the top 10 countries in terms of official gold holdings.

Official Gold Reserves by Country - Top 10 Holdings


But many purchases are not made through official channels and go unreported. Jan Nieuwenhuijs estimates that the PBOC actually held close to 5,550 metric tons1 at the end of Q1 2024.

Quarterly Central Bank Gold Buying

Source: Gainesville Coins

Private Purchases

Private gold holdings in China and India dwarf official reserves.

China’s private sector holds approximately 25,700 metric tons2 at the end of Q1 2024, according to Nieuwenhuijs.

India’s gold market is similar in size, with private investors holding between 24,000 and 27,000 metric tons of gold jewellery and bullion according to Blue Hill Research.


Gold demand is driven by a lack of faith in fiat currencies — whether it be US Dollars, Chinese Yuan or Indian Rupees — to maintain their value. Private investors are buying gold as a store of value while central banks are recycling trade surpluses into gold, rather than holding fiat currencies.

Silver and Copper are becoming the “poor man’s gold”, with price-sensitive buyers switching from gold into silver and copper as they grow relatively cheaper.

Countries with high private gold investment are likely to experience low rates of growth. Keyne’s Paradox of Thrift illustrates how savings parked in assets like gold and silver crowd out investment in productive assets, leading to lower growth in output.

Savings invested in debt and equity markets, by comparison, are largely channeled into investment in productive assets3 that contribute to GDP growth.

Efficient credit markets are the lifeblood of the economy, ensuring the transfer of savings into productive investment. Demand for speculative assets — such as precious metals and much real estate — reflect the failure of central banks to maintain price stability. Inflation increases investment risk in debt markets, leading to higher interest rates and increased demand for speculative assets, lowering economic growth. Inflation also accentuates the boom-bust cycle as central banks flip-flop between restrictive and stimulative monetary policy in an attempt to undo the consequences of their failed monetary policies.

The world is edging back towards a “gold standard” of sorts, where trade surpluses are converted to gold — or some other commodity like silver, copper or crude oil — rather than held as currency reserves. While not a perfect system, this would impose greater fiscal discipline on sovereigns, including the US, and contribute to increased price stability. It would also reduce the role of the US Dollar as global reserve currency and help to stem the damage done to the US economy over the past forty years by this “exorbitant privilege”.


  1. Estimated total PBOC gold holdings are 5,358 metric tons at the end of 2023 plus 189 tons in Q1 of 2024.
  2. Estimated total private gold holdings in China are 23,745 metric tons at the end of 2022 plus 1,411 tons in 2023 and 543 tons in Q1 of 2024.
  3. Debt that finances investment in speculative assets — producing low returns, like many real estate investments — does not contribute much to economic growth.


S&P 500 storm in a teacup

Markets were spooked by “hawkish” comments in the latest FOMC minutes, where some participants indicated a willingness to tighten policy should such action become appropriate:

Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2 percent or reducing policy restraint in the event of an unexpected weakening in labor market conditions. Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate. ~ Minutes of the Federal Open Market Committee: April 30–May 1, 2024

This is nothing new: all FOMC members should be prepared to hike rates if inflation spikes to the point where tighter policy is appropriate. What seems to have spooked markets is the fact that it was considered appropriate to discuss this out in the open.

10-year Treasury yields rallied to test 4.5%, ending the series of declining Trend Index peaks. Breakout above 4.5% would signal another test of 4.7% but breach of support remains likely and would signal a decline to test support between 4.0% and 4.1%.

10-year Treasury Yield

The large engulfing candle on the S&P 500 is a bearish sign. Expect a test of support at 5200 but respect is likely and would confirm our target of 5500.

S&P 500

The S&P 500 Equal-Weighted Index ($IQX) retreated sharply and is likely to test support at 6600.

S&P 500 Equal-Weighted Index ($IQX)

Financial Markets

Commercial bank reserves at the Fed climbed to $3.39 trillion on May 22, continuing the recovery of financial market liquidity after the sharp fall during April tax payment season.

Commercial Bank Reserves at the Fed

The inverted Chicago Fed Financial Conditions Index (black below) continues to climb, indicating easier monetary policy. The S&P 500 (blue) is expected to follow the FCI upwards.

S&P 500 Index & Chicago Fed Financial Conditions Index (inverted scale)

Wicksell Analysis

The chart below is based on the theory of interest and money published by Swedish economist Knut Wicksell in 1898. Monetary policy is restrictive when long-term interest rates are higher than nominal GDP growth (the marginal return on new investment) and stimulatory when LT rates are below nominal GDP growth.

We plot nominal GDP (silver) against 10-year Treasury yields (purple) below. Stimulatory monetary policy is evident in the 1960s and ’70s — with GDP growth (silver) above long-term rates (purple) — boosting growth and inflation. This followed by restrictive policies in the 1980s and ’90s before long-term rates were again suppressed to stimulate the economy in the last two decades.

10-year Treasury Yield & Nominal GDP Growth

Nominal GDP grew at an annualized rate of 5.5% in Q1 of 2024, while the 10-year yield is below 4.5%, indicating that monetary policy remains stimulatory. Further growth and inflation are likely.

Crude Oil

The counter-argument to the monetarist view is that crude oil prices are falling and likely to ease inflationary pressures in the economy.

Nymex light crude broke support at $78 per barrel, indicating a decline to test long-term support (red) at $68.

Nymex WTI Light Crude

Energy prices were the primary cause of the spike in CPI in 2021 and its subsequent fall in 2022-23.


Crude prices are likely to fall, easing inflationary pressures and leading to lower long-term interest rates.

We expect the Fed and US Treasury to maintain easy monetary conditions until after the November elections.

The current bull market in stocks is likely to continue until end of the year.

Ceteris paribus

The Latin phrase ceteris paribus means “all else being equal.”

If Vladimir Putin and Xi Jinping attempt to influence US elections by disrupting the global economy — through cyberattacks, damage to undersea communication cables, infrastructure, or transport bottlenecks — then all bets are off and we could be in for a wild ride.


Silver stars as stocks retrace

Markets are retracing to test new support levels after a strong surge during the week on weaker than expected inflation data. Silver and Gold are the exception, making new highs, with demand fueled by lower long-term Treasury yields, a weaker Dollar, and strong buying from China.


The S&P 500 is retracing to test support at 5200/5250. Higher Trend Index troughs indicate buying pressure. Respect of support is likely and would confirm our target of 5500.

S&P 500

In Australia, the ASX 200 retreated from resistance at 7900. Follow-through below 7700 would warn of another test of support at 7500/7550. Rising Trend Index troughs, however, warn that respect is more likely — that would mean another test of the all-time high.

ASX 200

Financial Markets

Ten-year Treasury yields retraced to test new resistance between 4.4% and 4.5%. Respect is likely and would signal a decline to test support between 4.1% and 4.2%.

10-Year Treasury Yield

Financial market liquidity is improving, with commercial bank reserves at the Fed recovering after a sharp fall during April tax payment season.

Commercial Bank Reserves at Fed

The Chicago Fed Financial Conditions Index is again falling, signaling easier monetary conditions.

Chicago Fed Financial Conditions Index

Bitcoin (BTC) recovered above the former $64K support level, confirming easier financial conditions. Retracement that respects the new support level would strengthen the signal.

Bitcoin (BTC)

Economic Activity

Real retail sales are edging lower but remain in line with their pre-pandemic trend (dotted line) — supported by full employment, lower inflation and government spending to secure critical supply chains.

Advance Real Retail Sales

Light vehicle sales remain below 2019 levels but sales above 15 million continue to reflect robust consumer sentiment.

Light Vehicle Sales

Heavy truck sales rebounded to 40.2K units, indicating reasonable business activity. Continuation of the recent down-trend, however, with a fall below 37.5K, would signal that the economy is slowing. Breach of 35K would warn that a recession is imminent.

Heavy Truck Sales

Precious Metals & the Dollar

The Dollar index is retracing to test new resistance at 105. Lower Trend Index peaks warn of selling pressure and respect of resistance is likely, offering a short-term target of 103.

Dollar Index

Silver is the star performer of the week, climbing steeply to close at $31.43 per ounce, following a brief pause on Thursday. Rising Trend Index troughs indicate strong buying pressure and our target of $32 is likely to be broken.

Spot Silver

Gold also displays buying pressure, although the Trend Index rise is not as steep as Silver. Expect retracement to test the new support level at $2400 per ounce, but respect is likely and would confirm our target of $2500.

Spot Gold

The chart below from Jan Nieuwenhuijs shows Gold as a percentage of global central bank reserves, from 1880 to today. There is plenty of potential for holdings to increase as central banks attempt to diversify away from a Dollar-based global reserve currency.

Gold as a percentage of International Reserves

China: Gold Demand

China sold a record amount of Treasury and US agency bonds in the first quarter as it diversifies away from US financial assets. Bloomberg:

Beijing offloaded a total of $53.3 billion of Treasuries and agency bonds combined in the first quarter, according to calculations based on the latest data from the US Department of the Treasury. Belgium, often seen as a custodian of China’s holdings, disposed of $22 billion of Treasuries during the period.

China: Reserves

At the same time, China is rapidly increasing its official Gold holdings.

China: Gold Holdings

China’s domestic Gold price consistently shows a strong premium over the international price, currently RMB 567 per gram (Au99.99) versus 558.8 for the iAu99.99 international contract on the Shanghai Gold Exchange. The cause of strong domestic Gold demand is not hard to find.

China: Home Prices

Chinese investors have in the past favored residential real estate as a store of wealth but growth in real estate prices ended in 2021. Investors are now switching their focus to Gold.

Crude Oil

Nymex light crude respected support at $79 per barrel. Penetration of the secondary (orange) trendline would suggest that a base is forming. Lower crude oil and gasoline prices are likely to ease inflationary pressure.

Nymex Light Crude


Silver is the star performer of the week, rising steeply to close at $31.43 per ounce. Gold also broke resistance — breakout above $2400 per ounce offering a target of $2500.

Stocks are bullish after weaker than expected CPI growth for April. The S&P 500 is likely to respect support at 5200/5250, confirming our target of 5500.

Ten-year Treasury yields are also softening on weaker inflation data. Respect of resistance at 4.4% to 4.5% would offer a target between 4.1% and 4.2%. Lower yields are likely to weaken the Dollar, further boosting Gold and Silver prices.

China continues to switch its official reserves from US Treasuries to Gold. Coupled with strong domestic demand from Chinese investors — disillusioned with real estate and the weakening Yuan — combined official and private investor demand from China is expected to maintain upward pressure on bullion prices.


US consumer incomes and credit card debt

Many market commentators talk about the struggling US consumer, with rising costs forcing them to take on expensive debt, but this is not borne out by the data.

Real disposable personal income per capita (blue below) reached $50.4K in March, compared to the pre-pandemic peak of $48K in Feb 2020. The subsequent spike in 2020-21 was caused by a massive rise in government transfers (red) which have now almost completely subsided.

Real Disposable Personal Income Per Capita & Government Transfers

Average per capita income could conceal a skewed distribution towards high income-earners but median incomes don’t show this. Real median personal income fell from $41K in 2019 to $40.4K in 2020, recovering to $40.5K in 2022. Unfortunately that is the latest available data, but there is no sign of a reversal in the long-term up-trend, with the recent dip minor relative to most past recessions.

Real Median Personal Income

Consumer loans for credit cards and other revolving debt have climbed steeply relative to disposable personal income, reaching 5.06% in March 2024 (blue below). But the sharp fall in 2020-21 was the result of a spike in government transfers (red) and the ratio is no higher than pre-pandemic levels of 5.08% to 5.15% in 2019.

Credit Card Debt/Disposable Personal Income & Government Transfers/Disposable Personal Income


Government stimulus helped to soften the fall in incomes during the pandemic and assisted the post-pandemic recovery. Real per capita disposable income is at an all-time high outside of the pandemic stimulus in 2020-21 and real median personal income displays a strong up-trend. Credit cards and revolving consumer debt are also no higher than pre-pandemic levels relative to disposable personal income.

We feel that many commentators are too focused on the negatives and fail to recognize the robust performance of the American consumer.

True cost of US debt | Niall Ferguson

Ferguson’s Law states that any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Hapsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the US beginning this very year, when (according to the CBO) net interest outlays will be 3.1% of GDP, defense spending 3.0%.

Niall Ferguson: China, Russia, Iran axis is bad news for Trump and GOP isolationists – Bloomberg, 4/21/24

End of Dollar dominance | Michael Pettis

Because a world in which the US dollar and the US economy continues to play its current roles in accommodating deep structural imbalances is unsustainable, a major shift is inevitable and we can’t simply call on Washington to prevent any change.

The issue should be whether Washington directs this shift unilaterally, directs it in concert with major allies, or waits until unsustainable pressures force a much more disruptive adjustment.

It’s not whether things will change but how they change.

~ Michael Pettis

Gold, Crude, Copper and the Elephant

Gold, crude and copper is where the action is, while stocks and Treasuries take a back seat for the present.

Markets are signalling a reluctance to take on risk, while long-term Treasury yields threaten to trend higher.

We also revisit rising Treasury debt — the elephant in the room — and examine the CBO’s budget projections in more detail.

Crude Oil

Brent crude respected resistance at $84 per barrel, signaling a decline to below $80.

Brent Crude

Nymex light crude breach of support at $78 per barrel would confirm the reversal. A decline in crude oil is likely and would ease inflationary pressures, with the expected fall in long-term yields bullish for stocks, bonds and precious metals.

Nymex Light Crude

Crude oil production remains steady at a massive 13.1 million barrels per day according to the EIA report for the week to May 3.

EIA: Crude Oil Production

Inventories (including SPR) recovered to above 1.6 trillion barrels, while market concerns eased over Iran-Israel tensions.

EIA: Total Crude Oil and Petroleum Products (Incl. SPR) Inventory


Copper is testing short-term resistance at $10K per metric ton. Breakout is likely and would test major resistance (green) at $10.5K.


The rise, however, is caused by a production halt at Cobre Panama. Production could be resumed if the mine-owner First Quantum can reach agreement with the new president-elect Jose Raul Mulino. From Reuters:

Mulino, a 64-year-old former security minister, won Panama’s election on Sunday [May 5] with 34% of the vote and said his government would be pro-investment and pro-business, adding that the Central American country would honor its debts, while he vowed to not forget the poor. He won with the help of popular former President Ricardo Martinelli who was barred from running due to a money laundering conviction. Mulino, who served as security minister during Martinelli’s administration from 2009 to 2014, had been Martinelli’s vice presidential candidate and took his place.

Gold & the Dollar

The Dollar Index continues to test support at 105. Respect remains likely, with Trend Index troughs above zero signaling buying pressure, unless Janet Yellen at Treasury intervenes to weaken the Dollar in support of the UST market.

Dollar Index

Gold broke resistance at $2350 per ounce, signaling another advance. But first expect retracement to test the new support level. Respect would confirm a target of $2500 per ounce.

Spot Gold

Shanghai Gold Exchange domestic contract Au99.99 is trading at 553 RMB/gram, equivalent to a USD price of $2380 per ounce at the current USDCNY exchange rate of 7.2268.


The S&P closed above 5200 on Friday but a doji candlestick and lower Trend Index peaks indicate a lack of enthusiasm from buyers.

S&P 500

The Russell 2000 small caps ETF (IWM) reflects the lack of broad market support for the rally, with Trend Index peaks below zero warning of selling pressure. Another test of support at 200 is likely.

Russell 2000 Small Caps ETF (IWM)

Financial Markets

Ten-year Treasury yields continue to test the band of support between 4.4% and 4.5%. Recovery above 4.5% would signal another test of 4.7%.

10-Year Treasury Yield

Bitcoin is testing support at $61K. Follow-trough below say $60K would confirm the decline — initially signaled by breach of support at $64K — and warn that financial markets are moving to a risk-off position.

Bitcoin (BTC)

Commercial bank reserve balances at the Fed, however, grew by $78 billion in the week to May 8, indicating that financial market liquidity is improving.

Commercial Bank Reserves


Consumer sentiment retreated to 67.4 in the University of Michigan survey for May 2024, but the up-trend continues.

University of Michigan: Consumer Sentiment

Five-year inflation expectations jumped to 3.1% but the three-month moving average, ranging between 2.9% and 3.0%, signals little change in the long-term outlook.

University of Michigan: 5-Year Inflation Expectations

The Elephant in the Room

Last week we published a note suggesting that investors were distracted by short-term noise and ignoring the elephant in the room — the precarious level of US federal debt. The bipartisan Congressional Budget Office (CBO) projects that Treasury debt will grow to a clearly unsustainable 172% of GDP by 2034.

CBO: Debt-to-GDP

The US fiscal deficit is projected to grow from $1.6 trillion in 2024 to $2.6 trillion by 2034. Remember: all projections are wrong, but some are useful.

CBO: Projected Deficits

Often the most useful part of a projection is the underlying assumptions.

Real GDP growth below is a modest 1.5% in 2024, reaching 2.2% by 2026 — nothing controversial there. But the inflation projection is Pollyannaish, assuming a steady CPI decline from 3.2% in 2023 to 2.2% by 2034 — totally unrealistic if the budget deficit is to remain at close to 6.0% of GDP.

CBO: Economic Projections

Assumed inflation (above) also impacts on projected nominal interest rates, with the projected fed funds rate declining to 2.9% by 2027 and 10-year Treasury yields to a low 3.8%. Every 1.0% overshoot in inflation would be likely to cause a similar increase in both long- and short-term interest rates.

The budget projection below is equally unrealistic. Defense spending, the CBO would have us believe, declines to 2.5% of GDP by 2034. Given rising geopolitical tensions with Russia-China-Iran, defense spending is likely to exceed the long-term average of 4.2%.

CBO: Budget Projections

Net interest is budgeted to grow from 2.4% of GDP to 3.9% of GDP by 2034 but is based on unrealistic interest rate projections.

CBO: Interest Rate Projections

Treasury debt is likely to grow a lot faster than projections — because of the likely understatement of both defense spending and interest costs. That means that debt held by the “public” will have to grow a lot higher than the $48.3 trillion projected by 2034. If real interest rates are too low, any shortfall in take up by the public will have to be absorbed directly or indirectly by the Fed.


Rising inventory and easing Middle East tensions have weakened crude oil prices. A long-term decline in crude would be likely to relieve inflationary pressures and allow the Fed to cut interest rates.

Copper is rising steeply due to supply shortages, but prices could fall just as rapidly if the Cobre Panama mine is reopened by the new president-elect.

Gold broke resistance at $2350 per ounce, signaling another advance. Retracement that confirms the new support level at $2350 would offer a target of $2500.

Long-term Treasury yields are testing support. Respect of support is likely and would confirm the recent up-trend.

Perceptions of market risk are rising, with Bitcoin testing support at $61K and the Russell 2000 small caps ETF (IWM) warning of selling pressure.

Financial market liquidity, however, recovered slightly in the last week.

Consumer sentiment continues to trend higher, while long-term inflation expectations remain steady at close to 3.0%.

The elephant in the room remains Treasury debt, with CBO projections understating likely deficits due to unrealistic assumptions for inflation, interest rates and defense spending. Debt issuance by Treasury is expected to exceed demand from foreign investors and the general public, leaving the shortfall to be absorbed by the Fed or commercial banks.

The result is likely to be higher long-term inflation, boosting real asset prices while eroding the value of financial assets.

We are long-term bullish on Gold, Defensive stocks, the Heavy Electrical sector, and Critical Materials (Lithium and Copper). The last two stand to benefit from the energy transition. We are also overweight short-term financial assets with duration of 2 years or less:  Mortgages, Term Deposits and Money Market Funds.

We remain underweight Growth stocks — which we consider overpriced — and long-duration financial assets.