Gold keeps going up week after week after week, with corrections few and far between. What ever happened to those long multi-month declines? Will they return? Eventually, maybe, but probably not anytime soon. Why not? Because all central banks around the world are going go be forced to print a whole lot of currency very soon. The banking system looks OK right now, but there is a serious issue deep within the sewers of the global dollar-based monetary system that is about to come to the forefront, possibly within weeks.
When there's a backup in the sewer system, nobody notices at first. It can build for years without anyone paying attention. But then, suddenly, when the sewage rises to the surface, everyone notices at the same time and they all start scurrying. Remember when Silicon Valley Bank collapsed overnight and we didn't even get a 24 hour warning? It just sort of happened, and that was it? Well, something like that is what could happen to the Treasury market generally, the backbone of the entire dollar system, on which every other currency in the world is based.
But don't worry. The system won't collapse. Central banks will save it as they always do by printing much more currency. It's just that the currency we use as a result will be worth a lot less, a lot faster than we're used to, reflected chiefly in the dollar exchange rates for the monetary metals gold and silver, which have been going nearly parabolic lately and will continue to rise even faster.
What's happening in the sewers is that bank reserves – those extra dollars held by banks that were handed to them by the Fed during previous money printing episodes beginning in 2008 – are running out again, and $531 billion in Treasury auctions for October are coming due for settlement today, October 31, the largest talley ever for a single month. $531 billion is about 10% of the entire monetary base of $5.588 trillion. Even if that amount clears without a hiccup, it's not certain that enough dollars exist to clear next month's hurdle as well.
If dollars suddenly become scarce again, we could see spikes in overnight lending rates for November, which will affect rates across the Treasury yield curve and the Federal Reserve will have to intervene and spit more dollars back into the system, and fast. That means they will have to lower interest rates a lot faster and continue to expand their balance sheet in a time of rising consumer price inflation.
The result will be renewed inflationary monetary policy in a time consumer prices are already rising faster than most of us are comfortable with.
On the other hand, the prices of all consumer goods are falling precipitously in gold and silver terms. So there is a way out. It just requires rewiring our brains as to what money is, and why all currencies that have ever existed inevitably inflated themselves into oblivion.
About Rafi Farber
Rafi is a monetary analyst and student of the Austrian School of economics. He is the publisher of the End Game Investor on Substack, where he details what is happening in the banking system and what exactly we can do about it. He lives in the Golan with his family. And no, he is not evacuating.
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