As the US Dollar Index makes new lows for 2017, some are surprised that the Comex Digital Metals aren't charging higher. For an explanation, one simply needs to understand the HFT drivers that move price on a daily basis.
Lets start with the dollar as that's where the action is today. After making new 2017 lows yesterday, we knew that today would be a pivotal day. When Count Draghi issued some "clarification" earlier to his remarks of Tuesday, it seemed a clear attempt to help the dollar of the mat. Instead, the POSX has fallen further this morning and now rests at almost exactly 96 and very near the KEY LEVEL of 95.88 that was the Trump election night reaction lows. A break of this level on a closing basis would seem to be a VERY significant development.
So with the POSX at new 2017 lows, why isn't Comex Digital Gold at new 2017 highs. Well, for everyone here at TFMR, the answer should be simple. While paying slight attention to the dollar itself, far more important to the buy/sell decisions of the HFTs is the specific pair of USDJPY and changes in the bond market. These are the two key inputs. The POSX ranks a distant third in level of importance.
And where are the USDJPY and bonds today? They are moving in the exact opposite direction of where they need to go to prompt the HFTs to buy CDG. Even with the POSX down, the USDJPY is barely down today. And bonds are down, too, with the 30-year Long Bond off 4 bps at 2.78%. These two in tandem far outweigh the effect of the tumbling POSX and, thus, CDG is only up $2 as I type at $1249.
So let's sum up once again. If you want the price of Comex Digital Gold to move higher, then you need:
- Demand for the derivative to exceed available supply
- This demand comes primarily from the HFTs so you need them to be buying
- The HFTs primarily take their buying cues from USDJPY and bonds
- So, in order to get price to rise, you need a combination of a falling USDJPY and falling interest rates.
Here's something intriguing, however. We noted during yesterday's POSX decline that the USDJPY was actually moving higher...which meant that while weakening against the euro, the dollar was actually strengthening versus the yen. This is odd but it is also a persistent bit of divergence that dates back to mid-April. See below where the POSX is shown as a blue line and the USDJPY is displayed as a red line:
A number of things could explain this divergence from just a simple, straight-up "US $ is stronger than the yen" to something more nefarious like The G-3 (Fed, ECB, BoJ) pumping the USDJPY due to its impact on the HFTs that drive the US equity markets. Regardless, it's very simple to deduce that IF the USDJPY had continued to track with the POSX for the past 10 weeks, it would be closer to 106 than 112. And if USDJPY was 106, where do you suppose CDG would be trading today?
So again, at the end of the day, this isn't complicated. The intraday and daily price of digital gold tracks primarily the USDJPY and it is further impacted by changes to US interest rates as discovered in the bond market. Besides that, very little else matters so you should not be surprised or confused when "traditional" correlations no longer seem to be present. We are now in 2017...not 2007 or 1997. There are no "markets" anymore, just HFT playgrounds that are directly or indirectly driven through Central Bank manipulation and policy. To understand and predict the changing price of "gold", this is really all you need to know.