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The Treasury Drought Is Over, The Budget Drought Ends - Gold And Bond Rally Rolling Over

Sep. 12, 2019 11:38 AM ETDGLDF, DIA, QQQ, SPY, TBT, TLT, UGLDF25 Comments
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  • Some keys things have happened this week.
  • Politicians return to work and start passing spending bills.
  • The Federal Trust funds that were drawn down as part of the extraordinary measures have been replenished.
  • The passing of the new Federal budget is only weeks away.
  • The inflection point trigger is upon us.

This week has seen some key events take place concerning the end of the gold and bond rally.

Firstly our Congress and Senate representatives return to work today after their summer vacation. This means that can start authorizing spending bills and also passing the budget deal that was agreed recently together with a two-year suspension of the debt ceiling.

This can be seen on the calendar entry below.

USA congressional calendar

Secondly, the Secretary of the Treasury has notified Congress and the Senate that the Federal Trust funds drawn down during the debt limit crisis have been made "whole" again. This means that the bond sales proceeds from the last weeks have been used to "backfill" the spreadsheet at the Fed that tracks the Federal Trust fund accounts.

This bond sales income would normally have been directed at regular government expenditure. In effect, bonds were being sold, and the proceeds were not flowing into the broader economy and thus had no stimulative effect until now.

The official letter is copied below

Secretary of the treasury letter to Congress regarding Trust Funds whole again

Proceeds from bond sales can now flow into and charge up the very depleted Treasury Cash Balance [TCB]. This is the bank account at the Fed that the US government spends out of. The balance is maintained with Federal tax receipts, and any shortfall made good with a bond sale. An internal rule is that the US government must always have a positive TCB. In reality, it can key money into existence any time it wishes, which is what the MMT people have been saying for years. But rules are rules and knowing how they work is tradeable.

Covariance of yields SPX and TCBThe chart above was taken from an excellent blog post by Mr. Robert P. Balan located here.

The blog post provides detailed information on possible trades and moves that can be made to use the above information.

The chart shows that the SPX and bond yields are about to follow the lead of the Treasury Cash Balance down into a September low. This is a low that has been accentuated by the debt limit crisis. 

The result will be a sharp rally in bond yields. This rally would have happened anyway for seasonal factors. The rally will be stronger now because the artificial treasury drought made bond yields lower than they would typically be. (TBT) (TLT)

The implications for Gold (UGLD) (DGLD) are clear and shown in the chart below.

TCB Bond yields and goldGold is shown inverted in this chart and will now start to fall in price now that the bond and gold rallies are reversing.

The good news is that after this dip in the major indices  SPY, DIA, QQQ  a Chrismas rally ensues. The new Federal budget expenditures (which tend to go out very fast in the first few months of the new financial year) and the restocking of the TCB powers the rally.

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