Here’s Why Primary Dealers Are Getting Buried, and That’s Bad for Us Too

Once upon a time, the US Treasury had to borrow a lot of money…

OK that’s all the time.  Unfortunately, now more than ever. And that’s a very big problem, despite the fact that it doesn’t looks so bad right now. After all, Treasuries have staged a massive rally for a month now. It’s all good, right?

Well, not so much.  Here’s why.

Demand for Treasuries at the regular auctions has risen more than the increase in new issuance lately. Both stocks and bonds have rallied over the past week. Accompanying that has been a gigantic surge in bank buying, and lending by non-banks.

This doesn’t bode well for the sustainability of the rally. Banks have a poor record of market timing, and rallies driven by leverage, as opposed to cash, grow increasingly fragile.  

The problem for the Treasury market is that these stock liquidations come in waves. One of those waves has just ended. Within the next few weeks,  the underlying shortage of money liquidity relative to Treasury supply will reassert itself. Treasury prices will start falling and yields will start rising again.

However, another plunge in stock prices could drive more Treasury demand. The markets remain very thin in both directions. Over the past 5 trading sessions the volatility has mostly been to the upside. But we can’t make a bet in that direction because of the underlying dynamics of the Fed pulling $50 billion per month out of the banking system. That exerts continuous drag, which will sap demand. Timing is the tricky part, which we must leave to technical analysis. I cover that for stocks in the Wall Street Examiner Pro Trader Market Updates and for bonds in the Treasury Market Updates

Meanwhile, Primary Dealers, the guys who essentially own and run the Wall Street casino, and who have special relationships with the Fed and Treasury, aren’t doing so well. 

Here’s what you need to know to avoid getting sick along with them.

Now That the New Year is Here, Can You Dig It? A Golden Opportunity

Amid all the market chaos of the past several months, there’s one vehicle that has developed a remarkably orderly, and classically bullish pattern. It’s not an investment that we normally think of as orderly. In fact, you may not think of it as an investment at all. Some Wall Street pros ignore it. Some recommend it only as a hedge against catastrophe, although I’m not sure that idea holds water. 

By now you have probably guessed what it is.  It’s the real money of the ancients, the shiny yellow metal, that many, perhaps even you, still believe is the only real money. Of course, it’s gold.

Now I doubt that gold has any monetary purpose for us as individuals any more. Clearly central banks think it does because they hold tons of that stuff in their vaults and some central banks have been on programs to acquire more of the stuff. But you and I can not now, nor is it likely that we’ll ever be able to exchange it directly for goods or services.

There Are Several Ways To Buy Gold

We could buy it and store it, and sell it later in exchange for conventional money. However, unless you are dealing in very large amounts, the spreads between bid prices and ask prices for the physical stuff can eat up most of whatever profit you might gain in the short run.

Given the drawbacks associated with holding physical gold, you could hold “paper gold” in the form of a mainstream gold ETF such as GLD, although many gold “bugs” will tell you to beware, that the ETFs don’t hold enough of the real stuff to guarantee backing. For trading purposes, I think the ETFs are about as risky as any other investment. “We pays our money and takes our chances,” as the saying goes.

If you’re a real high roller, you may even be keen to trade the gold futures. But look out if they go against you. The leverage can wipe out more than your investment in a few hours. 

Finally, there are the gold mining stocks. They can give you a piece of the action in the gold price, but they often lag and even go against the trend for significant periods. It can be very frustrating. Some miners are better than others of course. 

And in the long run, while gold trends higher with inflation, it has had very lengthy bear markets on the way up, which makes timing critical. If you buy near a top, you can wait decades to break even.

For practical purposes, I think that the gold stocks need to be traded on their own merits. Now, I know nothing about the fundamentals of these operations, or of the metal, which has limited industrial and consumer uses that have little to do with its price. I think that both the metal and the mining stocks need to be traded on the merits of their charts.

For me, gold is a trade. There are times that it can be a very long term trade, and other times, just an intermediate swing trade. 

So let’s look at gold’s potential both as a trade, and as a long term hold…

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