The Crisis is Upon Us – Investment Watch

by Alasdair MacLeod of

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In an extraordinary week of turmoil in global bond markets, gold and silver rallied. In European trade this morning, gold was at $1,672, up $28 from last Friday’s close. And silver at $19.16 is up 31 cents.

The big news was the collapse of long maturities in the UK gilt market, which required the Bank of England to step in, buying 65 billion pounds of long gilts on Wednesday. The situation arose as pension funds leveraged their gold portfolios through interest rate swaps and repurchase agreements up to seven times in an attempt to match their actuarial liabilities through liability-based investing (LDI). With more than a trillion pounds outstanding, a fatal loop of sales to satisfy margin calls was an emerging crisis that had to be stopped.

It’s been a wake-up call to investors who weren’t even aware of LDIs, let alone the Lehman moment they caused. LDIs are also common in the EU and the US, so the problem is unlikely to be limited to London.

A pause for thought has halted the rush of all currencies towards the dollar, reflected in the dollar TWI chart:

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From a high of 114.78 on Wednesday, the TWI has retreated to 111.61 this morning. Obviously, it is too early to say that the dollar has peaked, but given the weight of speculative money that is long dollars and short everything else, the chances of a significant reversal are high.

Gold and silver have benefited. Both metals are very oversold on Comex, with hedge funds (Managed Money) net short of more than 8,000 silver contracts in the latest Traders Commitment report (September 20) and net short of 36,695 gold contracts . Those short positions have likely increased since then, but we’ll have a better idea with an update after US markets close tonight.

Comex is finding a remarkable level of contracts pending delivery. This month alone, 37 tonnes of gold have been called for delivery, indicating that while hedge funds are playing their game and bullion banks are suppressing prices to recover their shorts, a mix of ‘high net worth individuals, long-term investors and perhaps smaller central banks are cleaning up the physical bullion market.

The conditions for a massive bear squeeze, similar to the one between March and August 2020, now appear to be in place. Anecdotal evidence is that ordinary people around the world are now concerned enough to destock coins and small bars at retailers.

With rising interest rates and bond yields just beginning, a crisis has already occurred in UK pension funds and gilts. Consumer price inflation that is approaching more than 10% everywhere and the promise to stay there confirms that they are still too low. This means that there will be more crises to follow, which will include swaps and repos, in addition to the contraction of bank credit.

Increasingly, those looking to escape an imploding fiat credit system are turning to real money, which is just physical gold and silver.

Guest post by Alasdair MacLeod of

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