Inflation may not be transitory after all
To explain, a repurchase agreement (repo) occurs when an institution discharges liquidity to the Fed in exchange for a Treasury security (overnight or short-term). And with US financial institutions currently inundated with excess liquidity, they are shipping money to the Fed at an alarming rate. I’ve been warning for months that activity is the fundamental equivalent of a decline due to the falling supply of US dollars (which is bullish for the USD index). Thus, pending a formal announcement from the Fed, the fundamental basis of the US dollar remains strong.
The bottom line? Powell’s only hope of curbing inflation is to strengthen the US dollar and weaken commodities (including gold and money) prices. For context, the major futures contracts are denominated in US dollars. And when the dollar rises, it is more expensive for foreign buyers (in their currency) to buy the underlying commodities. As a result, a stronger US dollar often stifles demand. And with the current supply and demand dynamics pushing commodity prices upwards, Powell will have to work magic – strengthen the dollar and reduce demand – if he wants his inflation problem to subside. .
In conclusion, gold, silver (ouch) and mining stocks sank like stones on September 29. And with the USD Index cutting 94 like a knife in butter, EUR / USD’s new 2021 lows were accompanied by new 2021 highs in the USD Index. Moreover, with the continuation of the momentum, the medium-term outlook for MPs remains rather bleak. As a result, further weakness will likely materialize before better days (likely) appear towards the end of the year.
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Przemyslaw Radomski, CFA
Sunshine Profits: Efficient Investing Through Diligence and Care
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