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The Basis Trade
I’m constantly looking for Black Swan events that threaten the financial system. Currently, the Basis Trade has my full attention. This occurs when hedge funds using extreme leverage short Treasury futures and go long their cash equivalent, capturing a tiny spread.
In theory, it’s a riskless trade because the spread between futures and their cash counterpart should remain stable. Another firm, Long Term Capital Management, used a similar strategy in the late 1990s. Eventually, market forces changed, and their strategy imploded in a dramatic fashion.
If the yield on the 10-year rises above 5.00% after next week’s QRA and Fed meeting, lookout!
Minskey Moment
A “Minsky moment” is a term in economics and finance that describes a sudden and severe market collapse. It’s characterized by a sharp drop in asset prices and a sudden shift in sentiment from bullish to overwhelmingly bearish.
The concept is named after economist Hyman Minsky, who studied financial instability and the cycle of optimism and risk-taking in financial markets.
The odds for a Minsky Moment within the next 12 months are around 70%, in my view. The exact trigger and timing are unknowable, but I see several potential black swans. Consequently, I think it’s a great time to be in cash and precious metals as we await the next opportunity.
Macro Update
Quarterly Refunding Announcement (QRA)
Every quarter, the Treasury releases its funding needs. Below is the reported issuance for October through December. Note the net cash raised for Q4 is $854 billion, of which $513 billion is new money.
The QRA for Q1 2024 comes out October 30th, two days before the Fed announcement. The Treasury will issue a lot of debt in the first three quarters of 2024; ever-rising supply with limited demand could keep yields uncomfortably high.
Unaffordable Housing
Mortgage rates hit 8% for the first time in 23 years. The Housing Affordability Index reached a record low at ~90. Affordability is down 50% since 2021 and nearly 70% from the peak in 2012. Americans now need $114,000 in annual income to afford the typical house in the US – up a massive 90% from $60,000/year in 2020.
Auto Delinquencies
The percentage of subprime auto borrowers at least 60 days past due on their loans rose to 6.11% in September, the highest in data going back to 1994, according to Fitch Ratings.
Difficulty Paying Expenses
October was the first month of student loan payments resuming since 2020. Already, we are seeing a large share of households having difficulties paying expenses. More specifically, difficulties in paying are concentrated among households with a college degree.
Gold Weekly
Gold prices are decisively above the downtrend line. If we continue to follow the 2019 analog, I see the potential for a breakout above $2090 in November. I still think we could see a run towards $3000 in 2024.
Gold Daily
Overall, this looks like a pause in the trend before the next rally. The true test will come after next Wednesday’s Fed announcement. Gold could break decisively above $2000 and perhaps attack $2090 soon after if the market believes the Fed is done hiking.
Silver Daily
Silver is consolidating below the 200-day MA. Prices must close above last week’s $23.88 pivot to support a breakout. The real fireworks will come after a breakout above $26.00.
Platinum
Platinum continues to struggle at the 50-day EMA. Prices need to get above the downtrend line ($940) to confirm an October bottom and a new bullish advance.
GDX
Miners need a strong close above $30.00 to confirm a bullish breakout. In the meantime, I see support near the $27.70 price gap. The real test will come after next week’s Fed decision. Miners are profoundly undervalued and see much more upside once gold breaks to new highs above $2100.
Conclusion
The October washout in precious metals is complete, and gold may be entering the next stage of a powerful bull market.
Next week’s Treasury refunding announcement and Fed meeting are critical.
Click here: To read our article on $10,000 gold and $300 silver.
AG Thorson is a registered CMT and an expert in technical analysis. For regular updates, please visit www.GoldPredict.com.
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