"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Sunday, February 16, 2014

Velocity of Money still Falling

Granted the most recent data ( Oct 2013) shows the key indicator still falling, we are still waiting for the January 2014 numbers. They should be available soon and then we might see whether or not Velocity of Money ( M2) is picking up as of yet.

Here are some additional charts detailing EXCESS Reserves of Depository Institutions

One more chart - this one details Total Reserve Balances. Here is what the note on the one of the Fed's websites states:

This item includes balances at the Federal Reserve of all depository institutions that are used to satisfy reserve requirements and balances held in excess of balance requirements. It excludes reserves held in the form of cash in bank vaults, and excludes service-related deposits

Here is the same data except updated on a weekly basis instead of the monthly update as listed above.

Here is what I continue to take away from these data sets. First, Velocity of Money still continues to fall although the data only covers through October of 2013. What might have happened over the last three months since then is unclear but my guess is, with the incredibly frigid winter and massive snow storms, consumer spending would certainly have been impacted. Thus I see no reason for the downward projectory of the Velocity graph to change.

Secondly, and this is the biggie in my mind - note that huge spike in both Excess Reserves and in Total Reserves that has occurred since the beginning of QE in 2008.

There were very few if any who believed that when the Fed first began their grand experiment in QE that it would not adversely impact the Dollar and by consequence positively impact gold, silver and the rest of the commodity complex. Initially it certainly did. However, what we began to notice was that for all this liquidity being created by the Fed, it was not having an inflationary impact as expected. If anything, the only thing seemingly moving higher after the first few years of this QE was the stock market.

Job growth remains abysmal, wages remain stagnant, labor participation rate continues a multi-decade lows, the ratio of total jobs compared to total population is going nowhere, etc,. In short, the economy has stopped worsening, housing sales have picked up somewhat, construction has increased somewhat but as far as strong, rapid growth, forget it. It simply has not happened, even with the enormous sums of money have been conjured out of thin air by the Fed with this Quantitative Easing policy.

Why is that? Well for one reason, based on the above charts, the "money" being created by this bond buying program continues to pile up as excess reserves in the Fed's account. The banks are not lending it into the economy at nearly the same rate that it is being created by the Fed.

Granted, when one looks at those last few charts, it is terrifying to think about what a tsunami that wall of money would unleash in the economy if it were released rapidly into the economy at large in the form of a ramp up in bank lending; however, the fact remains that taking on huge sums of new debt does not seem to be the general order of the day.

If anything, banks are probably more than content to park excess reserves there at the Fed and draw interest on them ( completely risk free) rather than risk lending those sums of monies out and risking some defaults.

The problem in the US economy, in my humble view, is not one of a stingy Fed, it is rather a regulatory and structural environment created by the current administration which continues to stifle business expansion and thus job hiring. One need only look at the runamok EPA and its war on the energy sector, the incredible boondoggle inaptly named the Affordable Care Act ( which is anything BUT that) and the refusal to open more federal lands to oil and gas exploration, a sector which is one of the few creating high-paying and solid jobs.

In short, there is only so much that the Fed can go through monetary policy.

How this impacts gold and the rest of the commodity sector should be considered by those with a bit of a more intermediate term view of things. Given the continued drop in Velocity of MOney and the continued surge in excess reserves, it is unclear to me how inflationary pressures are going to be unleashed into the broader economy as long as those reserves remain parked at the Fed.

Maybe the Fed will next resort of forcing banks to pay it for the "privilege" of holding excess reserves there. In effect, that would amount to a clear effort to force the banks to lend out the money into the economy. Given the increasing lawlessness that marks our nation, and the complete disregards of any Constitutional restraints, who knows what the Fed might do.

I would continue to keep a very close eye on the plight of the US Dollar. If the Fed does anything that might be construed as being negative for the Dollar, gold will move higher. If the Fed however comes out clearly not so much in favor of generating inflation but rather in providing what might be better termed, price stability, then I could easily envision a Dollar that is supported with a corresponding negative impact across the commodity sector in general.

This would not negate the specific supply/demand factors for individual commodity markets but what it would do is remove some incentive for the one-sided, lop-sided "buy everything tangible in sight" mentality that hedge funds are notorious for if they sense a concerted effort to weaken the Dollar.


  1. Hi Dan, great article, its getting more interesting by the day. Could you please give me your take on natural gas, do you think the price will start falling with better weather. thank you so much for your time, sincerely, Steven Richter

  2. Gold and Silver busting through resistance yet again...

  3. Only a matter of time before Yellen figures out something to get the banks to quit hoarding cash and start loaning to small businesses. Maybe by taxing bank reserves. If that happens, you will see an economic boom of unprecedented proportions.

    1. in order to loan to small businesses you need people willing to start/expand them. Dan has it right, the govt has made it just too hard to get one going. I think we need some regulation but what we have could be cut way back and still protect things/people.

    2. I didn't know that Yellen was working for the people.
      Last time I heard, the Fed was working for the banks...

    3. Agree fully with Northwind, no one wants to Borrow or Spend. Helicoptor Ben may throw as much cash, but that cash directly goes into the Safe!

      And also with such a huge expanded monetary base created in the last 5 years, Fed would not want velocity to rise too much as it would trigger hyperinflation. Fed is in a ROCK & A HARD PLACE.

  4. - OUT 25% of my long position on gold at 1329, one nail above the 1327.50 Fibonacci level on a weekly time unit of the move 1805_1180.
    - OUT of my long position on silver at 21.80...I may be a chicken but well, I bought at 19 a few days ago, so 15% are ok for me. PRobably too early, the target of the 19-20.60 range gave 22.20, but again, nearly 3 $ gain on a trade with a 0.15 $ risk, I prefer to make a nice profit now on this trade and go buy some south african wine :) If I could have sold 25% each time, I would have, but I bought only 2 contracts at that time, so, no flexibility.

    Remaining positions :

    1. If the market was to follow my "perfect scenario" this week, it would :
      - reach and bounce under 1337 (daily Fibo 62% of 1435-1180)
      - close under 1327 (weekly fibo 23% of 1805-1180).

      Of course I'm not expecting the market to react exactly like that, but that scenario explains the 25% profit taking in the 1330 area.

  5. Dear Mr. Dan,

    Very Nice Article which clearly explains the failure or QE (Chemotherapy). Failure to Cure Deflation (Cancer).

    You said in your article today : “How this impacts gold and the rest of the commodity sector should be considered by those with a bit of a more intermediate term view of things. Given the continued drop in Velocity of MOney and the continued surge in excess reserves, it is unclear to me how inflationary pressures are going to be unleashed into the broader economy as long as those reserves remain parked at the Fed. “

    If all this Extreme QE money is unable to revive the economy, then nothing can. And that is why the world is loosing faith in USA and its Dollar.

    This loss of faith in dollar is not being revealed openly by China via Dumping Bonds. China will never dump bonds. Sun Tzu said that one should never openly attack a Formidable Enemy. It should find the weak points and attack them.

    Thus China is attacking the weakness. That’s Physical Resources & Physical Gold. Acquiring it covertly and overtly at astronomical pace.

    So basially inflation is showing up due to all this commodity buying by china. Resources Hoarding.

    The Day the Comex Defaults on Physical Deliveries is the day the Village will come to know how long back Hyperinflation had started. That very same day, China will write off as loss its entire USTreasury Holding.

    Maybe supply issues at Comex are the reason the gold cartel are unable to suppress Gold & Silver anymore.

    Its Economic Failure that Gold has sensed. (Last Stage Cancer)

    1. Interesting. How much gold does China have when compared with their US Treasury Holdings?

    2. talk about Comex defaults is loose talk; none of the commod exchanges were set up as venues for physical delivery of beans or silver or whatever, although they do in fact have that capability; their reason for existence is for risk transference or price discovery, if you will; sparks, nv

    3. Shark;

      Thanks for the comments.

      I would have to take issue with your claim that "inflation is showing up due to all this commodity buying by China for hoarding purposes".

      Copper is generally one of the metals that keys off of China. It is down for the year. China has its own share of problems as non-performing loans continue to grow. recent data from China has been on the weak side. There are many who are concerned that the impact from the emerging markets issue will be lower commodity prices as demand drops from India, Brazil, Indonesia, China, Vietnam, etc.

      That is why it bears close watching.

      I would also take issue with you that it has been the gold cartel that has been suppressing gold prices at the Comex. That is simply factually incorrect. Until recently, it has been hedge funds that have been doing the selling with the bullion banks on the buy side.

      Based on the last two posts of mine, why in the world should have been moving higher the last two years when prices have been either flat or stagnant and many have been falling? Deflationary concerns have been in the ascendancy, except for equities, which is where a large chunk of the QE liquidity has ended up.

      Also, until this month, the Dollar has been generally strong. That in itself would refute your notion that the world has been losing faith in the Dollar. The dollar has been weaker this month because US economic data has been weak and that has revived talk of a hold on the tapering. that coupled with falling US interest rates has undercut the support of the Dollar.

      Please, if you are going to comment here, try to be more factually correct so that we can have an intelligent conversation.

      As far as Sun Tzu goes - China needs the US right now as much as the US needs China. It is a relationship that is very complex but until China has a sufficiently large enough middle class to create its internal demand, it is dependent on its export markets to the developed nations.

      Copper prices are down on the year thus far.

    4. Dear Mr. Dan,

      Tks for replying. Very Interesting arguments.

      Let me try & Explain with some facts to back my argument.

      Re: Dollar Index

      The only reason the QE-Anesthised $ rose past 2 years is due to the Eurozone Crisis which Relieved the $.

      From April 2011 to Aug 2012 the rise in DXY was purely due to EuroCrisis. If we remove this period from the DXY chart, then you can clearly see that the DXY has stalled and has gone nowhere.

      Infact the entire period of April 2011 to Current Day is a Distribution Dome which is nearing climax. DXY unable to breakout from the resistance at 81.50.

      After the initial April tapertalk euphoria, Actual Taper 1 & 2 has led to $ weakness. A bit of Emerging Market SafeHaven Buying helped the US10yr Bond Yields fall. But EM Central Banks getting desperate and selling their Fx Reserves to save their local currencies could Overwhelm this safehaven inflow into US10yr? As it is the TNX 8yr Weekly chart is now above its downtrend line with MACD firmly rising.

    5. Re: your comment "I would also take issue with you that it has been the gold cartel that has been suppressing gold prices at the Comex. That is simply factually incorrect. Until recently, it has been hedge funds that have been doing the selling with the bullion banks on the buy side. "

      Yes The Commercials (Bullion Banks) have been buying from the Large Specs all these 2 years. But we should ask the question WHY? I believe the Bullion Banks along with China very well know that Qe has Failed (As you clearly explain with your velocity charts) and that there are no tools left to cure Deflation. Thus they know that deflationary capitulation and reset are the only solution and Gold (Not Imaginary, But Physical) will Empower them after the Reset. It is said that JPMorgan has approx 6100 MT of Physical Silver Reserves.

      Steve : Yes Comex recently is probably for price discovery and not delivery, but its twin, the ETF GLD, has been bleeding all the Physical Gold to China & the Bullion Banks.

      I think the following phrase was coined by you, lost in the current market noise and which i greatly respect.

      "Nothing will unnerve the paper gold shorts more quickly and do more to undercut their confidence than to strip them of the real metal and force them to come up with more hard gold bullion to make good on deliveries. "Stand and Deliver or Go Home" should be the rallying cry of the gold longs to the paper gold shorts."

    6. Re: Copper

      Copper Inventories are overflowing in chinese warehouses. Despite this copper is being bought by china. Not only copper but copper mining too.

      Also, JPMorgan owns the largest copper warehousing companies in China. Upto 70% of Chinese Copper Stock is theirs!

    7. Re; Emerging Markets

      Would you not question the fact that if Velocity is collapsing sharply why is Fed Tapering QE?

      The only reason i can think is Fed is trying to bring back legitimacy to $ by scaring the Emerging Markets to respect USBonds.

      Will this work? The Anti$ cartel is getting really strong. Russia, China, Middle East etc are now trading with currency swaps. Even Egypt has given loyalty to Russia (arms deal). Saudi too is loose.

    8. Both Equity & Commodities are Hedge against Currency Failure (Hyperinflation).

      Excess Reserves have flown to Equities until now, but maybe its Commodities Turn to get attention.

      This may have Nothing to do with Economic Activity.

      Simply Hyperinflationary Demand.

  6. Hi Dan - I have been a silent reader for a good while. I liked your post on trendlines the other day.

    I'm also growing to like the ADX indicator. Would you let me know what settings are used, so that I can mimic your analyses?

    best regards

    1. Tom;

      14 days is as good as any to use for that indicator but you can tweak it to optimize it according to whatever time frame you want to use.

    2. Shark Krishna; Maybe I am wrong to be bullish the $, but here are some facts for you; to wit, Cable topped vs. the $ about 85 years ago, the Loonie in '07, Euro '08, and the Swissie and Aussie in '11. Now as far as wanting to own the paper of Venezuela, Argentina, Turkey, Iran, Thailand, S.Korea, and so on, well help yourself. And as far as the Iran-India-Russia-China oil deals and so forth in their currencies, well, the size is about a pimple on an elephant's ass, is all. It is the same old tired bullshit we hear from the stopped clocks over at KWN day in and day out. As for the big picture on China, I recommend you look back at Japan, circa '89 and then fast forward to the present. China imploding will make that episode look like child's play; that is all from Sparks


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