Bankingcrisis
#FED causing Commercial Real Estate/ Banking CollapseCommercial real estate
"..talk of black swans of an economic nature forcing the Fed to print trillions again. Commercial real estate may be the next domino to fall. Back in 2008, default rates rose to 9%, up from 1%, as interest rates rose.
Today, the damage to commercial real estate loans which total about $2.7 trillion could be far greater. Over 40% of the US work force now works remotely since May 2020. The decline in demand for commercial properties has worsened by recent tech layoffs. The value of office sector REITs have fallen by about 55% which translates into a 33% reduction in the value of office buildings.
The default rate of between 10-20% in commercial real estate which was the lower end seen during the worst of 2008 would result in about $80-160 billion in additional bank losses. This would be ruinous for hundreds of smaller and midsize regional banks that have already been weakened by higher interest rates. The 2008 financial crisis spread from the housing sector to the rest of the economy as large banks with exposure to housing took tremendous losses.
Today, the Fed has created a moral hazard in guaranteeing depositors. Bank executives may take bigger risks if they believe the Fed will step in to protect depositors."
BlackRock, Potential Bearish BAMM Targeting $161.70BlackRock has some Hidden Bearish Divergence across a few notable time frames and is below many of the major Moving Averages after Bearishly Pivoting at a 618 Retrace, if we can continue down from here we will eventually break below the B Point and go for a Full Bearish BAMM break down to the 0.886 Retrace at $161.72
KRE - Regional Banking Crisis or Opportunity? KRE Regional Banking ETF
We are currently at oversold levels that offered good historic returns even if we only rise 15% to TASE:TASECTORBALANCE (Dec 2018 low) before moving lower.
Given the evolving Banking Crisis we could we revisit the bottom of the long term channel by EOY. This would be a great opportunity.
Throwback to TASE:TASECTORBALANCE dollars current idea... stay frosty on this one traders. Current wick low is your stop.
Safe Trading
PUKA
Decision Time for Bitcoin this Week. Plus Some Positive SignsTraders,
Bitcoin has reached the end of a very important triangle. It's time to make a decision. This week we should find out if:
1) Bitcoin breaks up and beats our 30,500 resistance, or
2) Bitcoin drops from our triangle and retests our C&H neckline at 25,300
We are going to dig into the charts for a few more clues and I want to show you the charts that are most important for you to keep and eye on this week.
Stew
LUCKILY THE TEST TACTIC SUSTAINEDIT TOOK MONTHS OF PREPARATION.
A LITTLE OVER A YEAR AGO... NOTICED VERY PECULIAR PATTERNS ON A LOT OF VERY STURDY CHARTS. EXAMINED NEARLY 400 TICKERS... SOMETHING VERY IMPORTANT STOOD OUT.
DID SOME CALCULATIONS AND TESTED THE THEORY WITH A LIVE PORTFOLIO.
WHEN THE BANKING CRISIS STARTED PACKING IN, THE PORTFOLIO WAS RED AT FIRST. THEN EVERYTHING WENT GREEN... AND STAYED GREEN. LIKE M A G I C.
THE BANKING CRISIS WAS PERFECT FOR THIS PORTFOLIO TYPE.
VERY TUNED IN. EVERYTHING WORKED JUST AS PLANNED.
THERE ARE PLENTY MORE TO GO...
WILL TEST OUT THE LONGEVITY NOW.
WE ARE IN A CYCLE AND IT'S CLEAR AS DAY.
Strange things can and will happen.
The performance of our markets are extraordinarily fascinating!
Watched the market throughout the 2020 fallout... iT was nothing short of miraculous.
We are all lucky.
Count your blessings.
Take care.
P.S. Let's not get too excited. We have work to do!
BEFUDDLED BANKINGIt’s no secret that the US banking industry is facing some significant challenges when it comes to securities losses. In fact, the Big 4 US banks - JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America - are sitting on a combined $211.5 billion in unrealized losses. That's a huge amount of money, and it's certainly cause for concern among investors and analysts alike.
One of the key reasons for these losses is the ongoing volatility in the financial markets. As we've seen over the past few years, there have been a number of factors - from geopolitical tensions to trade disputes to the COVID-19 pandemic - that have contributed to significant swings in the value of securities. For banks that hold large portfolios of these securities, these fluctuations can have a major impact on their bottom line.
Another factor that's contributing to the securities losses among US banks is the current low-interest rate environment. When interest rates are low, banks tend to invest in higher-yielding securities in order to generate returns for their shareholders. However, as we've seen in recent years, these securities can be risky, and when their values decline, it can lead to significant losses for the banks that hold them.
When it comes to regional banks, the situation is even more dire. These smaller institutions often have smaller deposit bases, which means that they have less capital to work with when it comes to investing in securities. As a result, they may take on more risk in order to generate returns for their shareholders. Unfortunately, this can backfire when the securities they've invested in experience significant declines in value.
So what does all of this mean for investors and consumers? Well, for one thing, it's important to be aware of the risks that banks are facing when it comes to securities losses. While the banking industry is generally seen as a stable and safe place to invest, the reality is that there are always risks involved. As always, it's important to do your own research and due diligence before making any investment decisions.
For consumers, it's important to be aware of the financial health of the banks where you keep your money. While the FDIC provides insurance for deposits up to $250,000 per account, it's still a good idea to make sure that the bank you're working with is financially stable and secure. Doing so can help to protect your money and ensure that you have access to the services and resources that you need.
XAUUSD Short - Mid term bear scenarioExpecting a breakdown from this 14 - 15 day range. breakdown initially followed by pullback offers entry signal. if we back in range it could indicate consolidation is still ongoing/market uncertainty is in play.
With JP Morgan & Chase acquiring FRC, the risk of another "bank run" has been delayed, however, the banking crisis is not over yet.
Further downside correction, possibly even the HKEX:1600 area in sight in the Longer run.
Banks Bottomed?Back in March, all we could read about was the "Banking Crisis" whether it was written by mainstream financial media or Bitcoin Maxi blogs. Truly, the great end of the US Dollar was upon us finally, right?
Well, like all panics, the fear abates and we can now see that said crisis amounted to only 3 banks failing for specific and now well understood reasons.
First, the trade.
I went with a bottom play "TS Recap" on the Daily of TFC (title picture). I am play the low from March 15th as the line in the sand and stop loss. It goes up from here or it doesn't and I'm out. Pretty straightforward.
There was a similar setup that is progressing a bit faster in BAC (Bank of America) but I preferred TFC for the dividend yield.
Now, Let's talk Asset Narratives
Asset narratives, both positive and negative, come around in different industries from year to year. Now in 2023 we have the "Banking Crisis" that has affected all non-too-big-to-fail banks. What is an "Asset Narrative? The most recent contrarian narrative trade comes to my mind... Energy of 2021.
Remember 2021? Electric Vehicles were all the rage, they were going to replace all gas powered vehicles in the very, very near future. The smartest of experts were all telling people to divest from anything oil related. Oil was going the way of the dinosaur! Dirty energy was the most hated asset class. Oil futures even dropped below $0. Oil was FREE it was so devalued! People were GIVING IT AWAY!
The comfortable trade of 2021 was to buy Electric Vehicle stocks and IPOs. It may have felt good at the time but does not feel good now to be a bagholder.
I gas-lighted myself (pun intended) thinking I was crazy to buy XOM (just read the post title below). My reasoning was sound: oil was still very much necessary to our economy. Oil companies were still in the business of producing it. They clearly had lots of value. Why were they so cheap? It seemed like an obvious trade but almost TOO obvious. It was very uncomfortable to take the trade.
Taking risk involves uncertainty and makes us uncomfortable. Early in my trading career I thought that one day I would become so accustomed to taking risk that I would be completely unaffected when putting on a trade. That never happened. Instead, I became comfortable with discomfort.
These kinds of narratives come around once a year and in hindsight seem obvious. So now is that narrative for 2023 banking? I think it is. There are a lot of intelligent, reasonable, and well articulated REASONS that banks should be marked down. But that's where real opportunity lies... where is it not apparent.
When Fear Reigns Banking Majors GainIn times of crisis, investors rush to safety. When risk shows in places of safety, bank runs begin. One's pain is someone else's gain. Silicon Valley Bank (SVB) & Signature Banks' combined assets at $300 billion is witnessing a flight to safety.
At $300 billion, it is trivial relative to $23 trillion within the American banking system. Remember that the FDIC only insures deposits up to USD 250k. Both institutional and individual clients holding large deposits in regional banks are rushing to move their funds from regional to major banks.
Between 2020 and 2022, regional bank index outperformed the broader bank index. Regional banks business was designed to be lean - collect deposits and extend loans to home buyers and local businesses.
This was meant to be less risky relative to banking majors whose businesses were sophisticated and inherently risky. Hence the banking relief law passed in 2018, made regulations less onerous to banks with domestic assets of less than $250 billion.
As a result, by end of 2022, US had 2,100 banks with $19.8 trillion in assets. Only ten out of these 2,100 banks had domestic assets more than $250 billion.
Lax regulations led some regional banks astray with concentrated bets on customer segments and risk management of asset and liability maturity risk. With rates rising, tides receding, banks that were swimming naked became obvious.
Chart below contrasts the impact of unrealised losses on select US bank's tier 1 capital ratio. It is little surprise that SVB imploded with such an adverse capital situation when unrealised losses were accounted for.
Now as crisis of confidence in banking spreads across both sides of the Atlantic, depositors are rushing to move their money to larger safer bank and money markets.
FT reported on March 15th that large US banks are getting flooded with fund transfer requests from regional banks. SVB has triggered a tectonic shift in deposits unseen in more than a decade. Veteran hands know well that anxiety created by small shocks make larger crises less likely.
JPM, Citigroup are among the beneficiaries of regional bank pains. To aid customers to move deposits swiftly, these banks are taking extra steps to speed up client onboarding. It is reported that these banks are reassigning employees to account opening linked jobs to handle workload and to hasten the process.
HNI’s Shifting to Large Banks
Despite the liquidity backstop promise extended by US Fed and US Treasury, depositors are moving funds into larger banks such as JPM, Citi and Bank of America. This phenomenon is more so for accounts holding >$250k (the limit up to which is guaranteed by FDIC).
The 25 biggest US banks gained $120B in deposits in the days following the collapse of SVB and Signature while smaller banks saw a net outflow of $108B during that period. This has been the largest weekly decline in deposits at small banks and poses the risk of inciting more financial instability.
Citi’s private bank servicing wealthy individuals is opening accounts within a day compared to usual timeline of one to two weeks. Citi is reported to open accounts & initiate fund transfers even as new clients are under compliance checks.
Larger banks are subject to significantly tougher regulatory scrutiny as a result they become attractive destinations for shell-shocked depositors.
Portfolio diversification is not new. Long shadow cast by the debacle of three sizeable banks within a space of a week has exposed the fragility in the system. This has prompted depositors to diversify not only their portfolios but also their banks.
Moreover, comparing the actual assets held by large banks to mid-sized banks:
SVB and Silvergate, both of which collapsed had their assets largely held in bonds held to maturity or available for sale. For SVB, the maturity date was in the far future, posing liquidity concerns when a bank run ensued.
By contrast, Silvergate largely had bonds available for sale but selling them all at once would have caused huge realized losses.
Another interesting takeaway is the way in which each regional mid-sized bank adopts a different portfolio tailored for their specific clientele and their needs. Although, this allows them to fine-tune their operations and holdings, it comes with the downside of financial instability during periods of aggressive rate hikes and economic uncertainty.
By contrast, Citigroup, JP Morgan, BoA, and PNC have portfolios that are well diversified with a healthy mix of cash & interbank loans, loans, bonds to maturity, and bonds available for sale. Crucially, their significant cash holdings allow them to weather the storm far better and eases any liquidity concerns for depositors.
Capital Flow Towards Asset Managers
Large asset managers are also witnessing an influx of funds. Seemingly the money is moving away from regional banks and into majors and asset managers offering access to money market funds. Money market funds which hold US Government Debt are considered the safest destination for large amounts of fund given the overwhelming uncertainty in the banking sector. They also have the added advantage of offering investors seniority in case of bankruptcy proceedings.
Certain MMF’s are currently offering yields as high as 5.02% compared to a paltry 0.23% average for bank deposits, making the shift towards MMF’s a no-brainer for many.
More than $300B has flown into money market funds in March taking the overall assets in money market funds to a record $5.1T. This also represents the largest month of inflows for asset managers since the start of the COVID-19 pandemic. Goldman, Fidelity, and JPM are the biggest beneficiaries from these inflows.
Goldman’s US money market funds have increased by $52B or 13% since the beginning of the banking crisis on March 9th. JPM’s funds received $46B while Fidelity saw $37B of inflows according to data from iMoneyNet.
Capital Flow into Gold
Gold is one of the most prominent safe haven assets that investors look to in times of economic uncertainty and instability. This capital flow was seen during the 2008 financial crisis when bank deposits plummeted and Gold price skyrocketed.
The same can now be seen on an even larger scale. Commercial bank deposits have plummeted well below even 2008 levels while the price of gold is teetering around $2,000/ounce, the highest price ever.
Although, some gold investors choose to buy physical gold or jewellery, larger investors often opt for other instruments that are more cost effective such as ETF’s or Futures. This too offers the larger banks a huge opportunity to benefit from the inflow of capital into gold-linked products through their investment banking divisions.
GLD, or SPDR gold trust is the largest Gold ETF. It saw a net inflow of $915M in March. The same can be seen in CME’s GC futures which saw managed money traders increase their net long positions by 5x or 83k contracts ~$16B.
Trade Setup
This case study illustrates potential gains to be harvested from spread trades as funds move from regional banks to majors. With rates remaining elevated the majors enjoy a comfortable Net Interest Margin. Rising deposit base by cherry picking high credit quality customers will enable banking majors to vastly outperform the regional banks.
Therefore, this case study sets for three spread trades -
(a) Long JPM and Short KBWR (1:3)
(b) Long COF and Short KBWR (1:2)
(c) Long C and Short KBWR (1:1)
A spread trade requires that the notional values of each leg of the trade to be identical. Accordingly, the ratios above have been provided based on the closing prices as of April 3rd. Table below sets out entry, target, stop and reward-to-risk ratio for each of these trades.
Long JP Morgan & Short KBWR
● Entry: 2.82
● Target: 3.17
● Stop: 2.62
● Profit at Target: $16
● Loss at Stop: $9.5
● Reward-to-Risk Ratio: 1.7x
Long Capital One Financial & Short KBWR
● Entry: 2.08
● Target: 2.54
● Stop: 1.9
● Profit at Target: $21
● Loss at Stop: $8.5
● Reward-to-Risk Ratio: 2.5x
Long Citibank & Short KBWR
● Entry: 1.01
● Target: 1.19
● Stop: 0.937
● Profit at Target: $8
● Loss at Stop: $3.5
● Reward-to-Risk Ratio: 2.2x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com cme /.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
JP Morgan HnS Dragon with Bearish ConvergenceJPM after Bearishly Engulfing on the Monthly has formed a bit of a Head and Shoulders pattern while at the sametime forming a Bearish Dragon with some MACD Bearish Convergence as the RSI enters the Bearish Control Zone if price continues to do what it's doing i could see JPM making a full 0.886 Retrace.
📈 Bittrex Leaves the US, USA To Ban Bitcoin? China 2.0Bittrex leaves the USA due to a hostile regulatory environment. They claim the laws are not clear when it comes to Cryptocurrencies; this got me thinking...
Will the USA ban Bitcoin China style?
Leave a comment with your thoughts on this idea.
It is probable that they will try to ban Bitcoin before launching the CBDC.
A Bitcoin ban would send Bitcoin straight to $100K ($100,000.00 USD per BTC).
What are your thoughts on this?
Namaste.
P.S. Banking crisis not over, coming back with a vengeance in a few months. Be prepared!
USD/JPY steadies after taking a tumble, Tokyo Core CPI loomsUSD/JPY is posted gains on Thursday after dropping sharply a day earlier. In the North American session, USD/JPY is trading at 132.45, down 0.31%. Later today, we'll get a look at Tokyo Core CPI, a key inflation measure.
Wednesday was a day to forget for the Japanese yen, which lost 1.5% against the US dollar. USD/JPY touched a high of 132.89, its highest level in a week. The US dollar was broadly higher on Wednesday and a rise in US yields helped propel USD/JPY to even higher levels. US 10-yr and 2-yr Treasury yields both hit weekly highs, and the widening of the US/Japan rate differential is weighing on the yen.
The banking crisis has eased somewhat, with no spreading of contagion since the stunning collapse of four US banks and Credit Suisse earlier this month. The markets are calmer, risk appetite has improved, and investors have moved away from the safe-haven yen in favour of riskier assets.
Japanese inflation indicators have been pointing downwards and the markets will be keeping a keen eye on the March Tokyo Core CPI release later today. The February release showed a sharp drop in inflation, from 4.4% to 3.4%, but the decline was not all that surprising, as government energy subsidies kicked in last month and dampened inflation. Other core CPI indicators also eased in February. The March Tokyo Core CPI is expected to continue falling, with an estimate of 3.1%.
Japanese inflation releases are closely watched, as higher inflation could force the Bank of Japan to pivot its ultra-loose policy. The central bank has insisted that the high inflation is transient and it expects inflation to fall to 2% later this year. The BoJ has said it would consider tightening policy only if there is evidence that inflation is sustainable, such as stronger wage growth. Japan's labour unions won substantial wage hikes earlier this month, and time will tell if wage growth kick-starts the weak economy and leads to higher inflation, which could force the BoJ, under new management, to reassess its easy monetary policy.
USD/JPY is testing support at 132.60. Below, there is support at 131.12
133.75 and 134.48 are the next resistance lines
Bank Run to Gold Rush Gold rush up accordingly to each major news during the bank run crisis in March.
Problem seems to subside for now. We will explore the possibility of a contagion effect to a wider bank run in this video.
A story of having too much money problem
• It is a bank – need to pay interest to depositors
• During pandemic - invested 10yrs bonds yield average 1.79%
• Before Feb 2022 Fed fund rate at 0.25%
• Mar 2023 Fed fund rate at 5%
How about the other banks, will they also have a similar problem in time to come? With uncertainty still lingering I am seeing opportunities in Gold, other precious metals and commodities.
3 types of gold for trading:
• COMEX Gold
0.10 per troy ounce = $10.00
• E-mini Gold
0.25 per troy ounce = $12.50
• Micro Gold
0.10 per troy ounce = $1.00
Disclaimer:
• What presented here is not a recommendation, please consult your licensed broker.
• Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises.
CME Real-time Market Data help identify trading set-ups in real-time and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
Will tomorrow be the day $JPM drops to $71? I think it could >It sounds a little nuts, I know. But hear me out. We clearly have a double touch on the upper channel line on the 12 month- clear rejection. The 9 MA on the yearly looks awful too. General weakness, there and within the stoch rsi and mac d. The 3 month also looks awful. Let's hone in though on the 9 MA and 20 MA on the chart though- they're clearly about to fall through them. Oh, not to mention, the major obvious head & shoulders pattern. Everything looks horrible. Almost makes me wonder if the speech wasn't "awful" news today because tomorrow is the real drop, when everyone thinks the worst is out of the way... who knows? I just call the technical analysis like I see it. And based on the daily time frame anyway, I don't see anywhere else that JPM could LOGICALLY retrace to... so why would it? Time to drop :)
Will the FOMC continue the US30s run higher?Traders will be looking forward to today’s FOMC seeking future direction on rates as inflation starts to cool but remains high. The new banking crisis has also significantly influenced the markets over the last several weeks.
Stocks have been one of the markets hardest hit by the uncertainty thrown up by the banking crisis. The US30, in particular, has been hard hit, and sellers cut just over 7% off the index in four weeks.
Looking at recent price action, we can see some buyer confidence returning after bailouts, and political action was taken to help stop the rout. The US30 held support and broke its tight range yesterday with a 0.98% rally.
Inflation and rates had been key influences before the banking issues arose. Today’s FOMC could play an important role in the short term. Rates are now basically priced in with a 25-point increase, and Fed trackers see a 15% chance of a hold at an 85% chance of a 25-point increase.
The statement for us is the important part unless we see a hold which would be unexpected and should give the US30 a boost through its trendline. If the Fed remains hawkish and discounts the banking issues, this could set off selling with worry over higher rates and possible inaction to support the sector. If the message is more to the dovish side, we will be looking for further upside from the new up leg, and hopefully, a break of the current trend could show signs that the correction could be starting to wain.
Minor resistance remains at 32,600, and support is seen at 31,850. Price continues to hold a series of LHs and LLs, but a new push higher could break that pattern.
The short term comes down to the fed message, which will be released at 05:00 am AEDT with the Federal funds rate. The press conference follows at 05:30 am.
Key Levels and US Market Review for the Asian session open 21/03Share markets bounce back ahead of FOMC after news that UBS will buy Credit Suisse. The rescue news was taken as a positive as bargain hunters supported lows and sent Europe higher with the bullishness flowing over into the US market open. Expecting the market to be supported into FOMC and the Feds outlook on inflation and interest rates. This meeting will be interesting as the recent banking issues led many to believe the Fed will not raise and potentially cuts rates soon.
A review of the price action from the European session and the US session.
I look at some key levels to watch and the price action setups I expect to see play out on the major markets below.
Markets covered :-
DOW
Nasdaq
DAX
FTSE
ASX200
Hang Seng
USD Index
Gold
Oil
Copper
Inflation on 20 years "Borrowed Time"Gold started its rally since 2000.
Whereas inflation and interest rates remain low since 2000.
Reason for the "Borrowed Time"?
Because easy money policy was needed to create:
1) An increase in money supply
2) By lowering its interest rates
Purpose for easy money policy?
3 major events after 2000:
1) Middle East War
2) Subprime crisis
3) Covid-19 rescue plan (it tipped in 2020)
The after effect of the accumulated easy money policy seem to be at its beginning.
Meaning more upside for inflation and interest rates.
Meaning Gold to continue its upward momentum.
For traders -
3 types of gold for trading:
• COMEX Gold
0.10 per troy ounce = $10.00
• E-mini Gold
0.25 per troy ounce = $12.50
• Micro Gold
0.10 per troy ounce = $1.00
See the video version below
Disclaimer:
• What presented here is not a recommendation, please consult your licensed broker.
• Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises.
CME Real-time Market Data help identify trading set-ups in real-time and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
Gold Shines amid Global Financial DistressCOMEX: Micro Gold Futures ( COMEX_MINI:MGC1! )
Gold prices surged Friday as a wave of banking crises shook global financial markets. Spot gold climbed 3.1% to $1,977.89 per ounce, its highest level since April 2022. Gold price is now within $100 of its all-time high of $2,074.88.
In the futures market, the nearby April contract of COMEX gold futures settled at $1,973.5, where the far-month June 2024 contract closed at $2,076.9.
The year-long Fed rate hikes cracked the US banking system. Within two weeks, we have witnessed the collapses of Silvergate Bank and Silicon Valley Bank in California and Signature Bank in New York. First Republic Bank, a mid-sized bank in California, received $30 billion emergency injection from 11 largest American banks, led by JP Morgan.
Interestingly, it was J.P. Morgan who organized a $30 million rescue plan to avert the collapse of Wall Street in 1907. That crisis led to the creation of Federal Reserve System.
A century later, the cost of bank bailout increases by 1,000 folds. However, bank runs have already spread. Credit Suisse, a prestigious investment bank, is under distress. On Sunday evening, fellow Swiss bank UBS announced that it is acquiring Credit Suisse.
Gold Price Rises in Times of Major Crises
In the past two decades, gold price peaked in times of market turbulence.
• The 2008 financial crisis
• The 2010 European debt crisis
• The 2018-19 US-China trade conflict
• The outbreak of COVID pandemic
• The Russia-Ukraine conflict
• The March 2023 bank run
Gold price is also negatively correlated with the US dollar. Last year, when Dollar rose on the back of Fed tightening, gold took a beating. Now, as investors expect the Fed to slow rate hikes, gold shines through the chaos.
Investing in Gold: what in there for you?
• Diversification: Gold helps reduce the overall risk of your portfolio by providing a hedge against inflation and currency devaluation
• Tax efficiency: Long-term capital gains on gold investments are taxed at a maximum rate of 28%, which is lower than 37% for other long-term capital gains
• Protection against rising prices: Gold has historically been a good hedge against inflation, and it can help protect your purchasing power
• Liquidity: Gold ETFs and Gold Futures are highly liquid financial instruments. Many brokers also buy and sell gold bars and gold coins, with a commission.
• Hedge against difficult economic conditions: Gold is a global store of value, and it can provide financial cover during geopolitical and economic uncertainty
• Portfolio diversifier: Gold can act as a hedge against inflation and deflation alike, as well as a good portfolio diversifier
In a previous writing, I showed that gold did not work well as a hedge against inflation.
However, gold holds up extremely well during major crises where other assets lost value.
Hedging against Known and Unknown Risks
Risk on, gold goes up. Risk off, gold declines. Some risks are expected, while others come as a surprise.
Fed rate actions are scheduled events and can be considered known or expected risk. CME FedWatch Tool shows the likelihood that the Fed will change the Federal target rate at upcoming FOMC meetings. It analyzes the probabilities of changes to the Fed rate and U.S. monetary policy, as implied by 30-Day Fed Funds futures pricing data.
As of March 19th, FedWatch estimates a 38% chance of Fed keeping the current rate unchanged at 450-475 bp, and 62% odds of increasing 25 bp to 475-500 bp.
By providing $300 billion in emergency lending to member banks, the Fed has effectively put Quantitative Easing at work. In my opinion, the Fed has switched its priority from fighting inflation to crisis management. Managing the systemic risk in the US banking system outweighs the battle against inflation at this time. It’s a matter of priority.
What’s unknown is the potential failure of any bank not yet exposed in the news. US banks are estimated to sit on unrealized loss in hundreds of billions of dollars in their bond portfolio, largely consisted of Treasury and US agency bonds. As the “held-to-maturity” asset will be sold or marked down, these banks could run into trouble by a run of depositors and investors. In this unusual time, no news is good news.
Short-term Trading Strategies
The upcoming FOMC meeting on March 22nd make a compelling reason for event-driven trades on Micro Gold Futures.
Here is my logic:
• If the Fed keeps the rate unchanged, stock market would rally. As a major risk is removed from the financial system, gold price would fall
• If the Fed raises 25 bps, stock market would fall, and gold price would rally, potentially breaking the current record high
Micro Gold Futures (MGC) contract has a notional value of 10 troy ounces. At $1,993.4, an April 2023 contract (MGCJ3) is valued at $19,934. Initiating a long or short position requires a margin of $800. This is approximately 4% of contract notional value.
If gold price moves up to $2,050, a long futures position would gain $566. Relative to the initial margin, this would equate to a return of +70.8%, excluding commissions.
If gold price moves down to $1,900, a short futures position would gain $934, a theoretical return of +116.8%.
Unexpected market event could be a trigger for gold price to rally. An event-driven trade idea could be constructed around it. In my opinion, comparing to the distress of regional banks, the systematic risks triggered by a Big Bank failure could send global market in shock at ten times the magnitude. If the Fed raises rate next week, I expect more bank failures to coming in the next few months.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
WIRECARD AG 2020 was a hard time for everyone because of Corona , but one of the biggest shock of stock market was Wirecard scandal.
I believe even after all this chaos around Wirecard, it would rise again in future. Of course the time could not be predicted.
Wirecard was a BlueChip stock, they have billions of Euro worth business running still now.
The share fell down because of scandal and closing operations in different countries, but in longer term if there comes the long waited news of selling Wirecard to a new company could push the price upwards. As, it could bring relief and trust among investors once again.
*** Do your own research. This is only my own analysis, not an investment advice.