Rafi Farber: Money Supply Plunges as Repos Surge to $2 Trillion a Night

Could they get squeezed? Yeah, they could. Will they? Probably not yet, because there’s no panic in currency markets. We also need a reset on the other side in the longs and the managed money category. I’ll show you the charts coming up. We’re going to look at the long-term open interest situation in silver contracts derivatives in China and how open interest has been falling hard since 2021. And if price is going up in China, the premium is very high. I think it’s around 10% now. And I think silver prices in China right now are around $36.

We can expect the same thing to happen in all derivatives markets for metals. Open interest going down and price going up as derivatives are rejected in favor of actual products. Not completely rejected, but downgraded. And we’re going to look at the repo markets, how volume has broken $2 trillion again overnight. And the repo markets are, of course, where banks borrow cash from each other in exchange for treasuries. Why is the repo market volume so high? And I think it has to do with the treasury basis trade, which is at another record in shorts. In order to fund those trades, traders borrow from the repo markets.

And with the balance sheet continuing to fall, this is going to lead to her apocalypse at some point soon. I don’t know when. I know I’ve been saying this for a while, but it is mathematical certainty. And while gold and silver have been steady in dollar terms, they have been rising steadily in commodity terms, and silver is actually leading. And we saw the second biggest April drop in money supply ever. Second one to 2022, which probably means we are going back into absolute deflation, which is going to make equities a little bit rough going forward.

And we’ll see where it leads. This week’s silver report is brought to you by… Wait, see if you can guess. Boratuna Silver Mine’s FSM. I’m not even going to show you a chart today because we all know it’s going up its way up along with most miners. And I expect that to continue with fits and starts. But what I want to show you today is the quarter one 2024 financial highlights with some operating highlights also. So we have total liquidity this quarter of $213 million. We can see the trend has been going up since last year.

$98, $162, $213 million. Total debt has been trending down from $292 million to $171 million. And net debt is only $83 million, thanks to paying down of debt each quarter. Aside from finances, we can see the all-in-sustaining cost from each mine for Seguella. It’s $948 per ounce for gold. Lindero is $1634, and that is the highest all-in-sustaining cost of all our mines. $1373 for Yaramoko. This is all comfortably above the current gold price of about $2360. If I remember correctly, San Jose mine for silver is $24.24. And with a $31 spot price, that’s also way below the current silver price.

And all-in-sustaining cost for Kailum is only $1718. So all of their mines are comfortably profitable. With comfortable finances, it’s a comfortable company. We are all very comfortable up here. That’s right, isn’t it? Yes, we are very comfortable up here. That’s very comforting. Let’s go on with today’s Silver Report, brought to you by FSM. But before we get to that, if you want to check out the Endgame Investor, then check it out on Substack at endgameinvestor.substack.com. You can become a free subscriber for free, which is redundant. I tried to put all the funny stuff in the beginning, so even free subscribers can get a laugh because if we don’t laugh, we’re going to lose our minds because the world keeps getting crazier.

And it looks like we’re in for round two of some kind of plot to take over the world by the medical authorities. But anyway, as I was saying, the COT reports, we need a reset in swaps. Swaps are bullion banks. The bullion banks are theoretically short gold. This is the gold, not silver. They are short gold theoretically in New York and long gold in London. I don’t know if that’s actually true. I hear both things. So in the black boxes, we can see highs in gold corresponding with lows or with actually highs in short because the more negative this goes, the more short the bullion banks are.

So all the black rectangles are like that. We can see a high in gold here. This is the March 2022 nickel squeeze, which squeezed all commodity derivatives, I think, and other derivatives also. We are at the similar numbers of short and bullion banks here in gold. And here is another high. This was silver squeeze, I believe, and a high in shorts, and same here. In 2020, this was the plunge, that tiny little plunge that freaked everybody out, this little thing over here. And it corresponded with a high in shorts in bullion banks. And same thing here at the top of the market in 2016 when miners were really at their top at that point.

And we have here a high in gold and a high in shorts. And these other colored rectangles, I think they’re red. I think I picked, that’s what I picked. And we have here the 2008 bottom. We have a low in shorts here and same thing here. They’re actually long, these swaps. The bullion banks were long here and that was the 2015 bottom in the gold market. And here we had a net long in swaps here and the local low in gold and here, same thing. So, what I’m saying is, we need a reset in these numbers and things could get a little bit bearish in the very short term, maybe a few weeks, maybe a month.

Or, we might just trade sideways or we could have a short squeeze. It’s possible and it’s going to happen at some point. I don’t think it’s going to happen this time, but it’s going to happen eventually. And you don’t want to be out of the market when it does. Same thing here in managed money. This is basically the inverse of that chart, so who takes the other side of the swaps. It’s the managed money, that’s the hedge funds. And you can see, when they dip into short territory, you have a low in gold. And when they’re high in longs, then you have a top.

So, it’s probably going to be the same thing this time. We have a high here and a local high in longs. It’s about 150,000 contracts. We’ll see what happens. Maybe we’ll trade sideways, but I wouldn’t expect a long, hard rally from here in the very short term because the COTs don’t reflect that right now. So, if you’re looking to add to your stocks, you have a little bit of time. I don’t know how much, but it’s not going to be that long. Now, I wanted to take the broad view in China and silver. People have been talking about silver in China, especially by Jiajun on Twitter or X or whatever it’s called.

So, the price of silver in China last closed, I think, Thursday or Wednesday or one of those days was $36.32 an ounce. That is a big premium. And what is going on in the long term in silver in China? Well, this is open interest in China’s future. In China’s future. Chinese futures in silver. So, we see here from the top in August 2020, I think that is. This could be silver because there’s something around there, similar time frame. So, we have a high in open interest here. It looks like a little bit above 700,000 contracts.

Or was that 1.7 million contracts? I don’t know, there’s too many zeros here. I don’t want to count them all. But it’s really a high here, whatever the number is. And open interest has been falling very hard and has continued to fall. And we’re at lows not seen since around 2022. We’ve kind of evened out here, but I’m saying long term. Open interest is falling and price is rising. So, this is the trend that we will see in the COMEX that we haven’t seen yet. The falling open interest and higher prices. This is basically a squeeze on the derivative holders and the contract holders.

And we see here that the volume has really dropped off a cliff here after very popular trading over here in 2020, 2021 era. So, what we’re seeing in China is what we’re going to see in the COMEX, though we haven’t seen it yet. The COMEX and London, I think, will follow too. And I wanted to go into the SOFR market, which is the secured overnight financing rate market, which is the repo market, the opposite of the reverse repo market, which is like you could call it the reverse, reverse repo market. Lions, there are sea lions on the land.

Yep, we call them land sea lions. I tame them. Don’t call it that. That’s kind of redundant. I want you to keep this picture in your mind. If you have an idetic memory or a photographic memory, that would be ideal. If you don’t, well, I guess you’re just not good enough. So, we have here, this is the volume in repos. How much dollars, how many dollars are trading overnight between banks? And we hit here the $2 trillion mark for the second time. Right here, this little line here is the $2 trillion mark. We hit it once at the year turn.

And once again, so we have volume in the SOFR market and the repo market rising with a very defined trend line over here in the black that I added in on paint, because I’m awesome with paint. And we saw here their apocalypse happen at a local high over here when the repo market went to 10%. Overnight interest rate went to 10% and then the Fed had to intervene into the repo market. That was here after a trend higher from 2018 until September 2019. So, we’re seeing the same trend over here. Where is it going to break? Don’t know, but with the balance sheet continuing to shrink and the dollar volumes continuing to grow, that’s opposite.

And when two trains are headed in the opposite direction on a train track, as we learned in math, they crash at some point and then distance equals rate times time and you have to know all the variables, but none of us do. But it’s going to lead to a apocalypse again or something like it and the Fed is going to get involved and then the metals are going to go nuts. So, remember I told you to keep this in mind well. It starts to head up in the middle of late 2022, right? Late 2022, the trend starts higher.

So, if you look at this, this is the COTs in the two-year treasury note. So, in 2022, this starts to fall, meaning this is the amount of shorts held by the, I think these are the blue, whoever the blue is. I don’t know who the blue is. I got rid of that key. So, whoever’s holding these shorts is somebody and the shorts are at an all-time record high and as these shorts increase, these short contracts in two-year treasuries increase. This is a basis trade, right? They’re selling the futures short and they’re going long spot and profiting off the difference, which is like fractions of a penny.

So, as these shorts increase, the repo market volumes increase as well because the repo market is how they’re funding holding these contracts, holding these trades and renewing it every night. So, this is going to lead to some kind of explosion because the dollars are running out. They’re not going to be able to fund these trades. There’s going to be something going on in the basis trade and it’s going to disturb the bond market at some point soon. To the money supply, the numbers came in on Tuesday or Wednesday, sometime this week, and this is the seasonal drop in April and the first two weeks of April, it was about $300-something billion and it’s an all-time high for the drop in money supply.

This is only showing back to 2014, but if you go all the way and then you see all these like zigzaggy lines and you can’t really make them out, but trust me, this is the second biggest drop. It was bigger than 2023. It was bigger. It was only smaller than the seasonal drop in money supply around tax day in 2022. The reason this happens is that taxes are paid. They go into the treasury’s account. The treasury’s account is not part of the money supply and money supply shrinks. So if money supply is shrinking this strongly on tax day, we’re headed back into absolute deflation because in seasonal trends, money supply is not going to start growing again until around late August.

So gold took a rest this week, but really so did commodities. The gold to commodities ratio is coiling at around whatever that number is, 8.03. It’s just above the 200-week moving average of 8.01. So we’re hanging on right here. Commodities as a whole are taking a rest. It’s not just gold. Now, if we switch to silver, we can see that silver is actually leading gold versus commodities. We’re at .11, whereas the 200-week moving average is .10. And silver can use to climb here higher than gold despite silver’s fall yesterday. It looks good, and we broke a triple top here in silver to commodities, and it looks like we’re sustaining above it the silver squeeze high of $30.20-something cents.

Well, that’s it for today’s silver report, guys. It looks like we are convalescing. Coalescing? Convalescing is getting better from a disease. We don’t have a disease. Thanks for tuning in, and if you’re interested in becoming a patron on Patreon for as little as $3 a month for some interesting lessons in gold and silver, ancient lessons from about a little 1800 years ago, 1700 years ago. Last story we covered was advice on stacking and not panic-selling into a thin market about a guy who was able to mortgage his afterlife riches so he could go shopping for the holiday, and he was advised not to sell those riches that he got from heaven into a thin market on Holiday Eve, so he got a bridge loan.

More on that at patreon.com slash endgameinvestor. This is Raf here with the Endgame Investor for this week’s silver report for Arcadia Economics, and I’ll see you guys next week. [tr:trw].

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