Swap Dealers Vs. Gold Price

As one can see in the chart below, swap dealers (red line) – similarly to producers and contrary to money managers and other reportables – are generally net short and move in the opposite direction to the gold prices – they actively buy (reducing their short positions) when the market goes down and actively sell when the market goes up (increasing their short positions). For example, swap dealers were systematically adding short contracts from mid-2008 until mid-2011, when the bull market ended. This is why investors look at swap dealers and use changes in their positions as a sentiment indicator for the gold market – swap dealers tend to be most bearish just prior to significant price tops and most bullish just prior to significant price bottoms.

You can find the swap dealer information in the COT report.

U.S. Dollar Liquidity Vs. Emerging Markets

When U.S. dollar liquidity goes down, it means that there is a tightening in U.S. dollar funding conditions. This coincides with a negative EUR-USD cross-currency swap basis. 

Dollar borrowing conditions can be improved by implementing quantitative easing (QE). This will depreciate the U.S. dollar. One of the global effects of this is that emerging markets will benefit from this added U.S. dollar liquidity (see chart below).

 

Tightening of liquidity is best seen at the shorter end of the curve. See chart below when Deutsche Bank started to have troubles in September 2016.

As U.S. dollar liquidity tightens in September 2016, I expect that the Federal Reserve will initiate another round of quantitative easing to ward off such U.S. dollar liquidity panic.