On Monday, September 9, there was a computer-related glitch in the US Treasury’s auction system that for some as yet unexplained reason did not allocate any of the 3-month bill issue to Goldman Sachs. The treasury made up for that by over-allocating in the 6-month issue, thus creating some pricing anomalies that caused a minor stir in repo and collateral markets.

At that time there did not seem to be any spillover into gold markets, specifically, as forward rates and gold prices appeared to be unaffected.

However, this morning’s postponement of the scheduled bill auction due to a systems “testing” glitch just might be related to the obvious gold price pattern. We don’t know (nor will we ever) when the primary dealers were notified by the treasury of the glitch, or ever the possibility the auction would be postponed, but it’s safe to assume that they got the news (either officially or not) long before the public announcement.

Bill auctions are vital in collateral chains, particularly as the on-the-run heads toward maturity to be replaced by a new issue. As these older OTR’s grow more stale, they endure pricing trajectories somewhat apart from their less stale cousins. A one-day delay in the auction perhaps might not be a much of a problem, but you never know how collateral markets may accept an increasingly illiquid issue, even for an extra 24 hours.

In terms of pricing, there is no change in the 3-month bill rate, but the 6-month has fallen from 11bps on Friday to about 9.5bps this afternoon.

Gold price behavior began, as it usually does, with Asian access market declines. There was the $10 cascade from 1am to 5am ET, and then a larger selloff beginning around the usual 8am ET. In terms of gold forward rates, it’s clear there is little activity as forward rates are identical between last Friday and this morning, with the exception of the 1-month rate. That might suggest even marginal collateral issues could have a wider impact

It’s hard to know exactly what is taking place, so this is all just speculation at this point based on the well-established connection between gold and interbank wholesale money markets. Given two outlier events occurring in short order, it is difficult to not at least investigate their potential relation, though we may never actually know the exact and proximate cause for today’s gold price behavior. Transparency is not something you expect from gold or collateral markets; all we have is outliers.

There is also the issue of these glitches. In terms of an outlier event, I also have to wonder about their sudden appearance, particularly given stress in dollar markets elsewhere. There is, obviously, no evidence that those two are related either, but again, you have to wonder why computer glitches have suddenly become an added feature to these systems. Causation and coincidence are often confused one for the other, but sometimes there actually is more than peculiarity under the surface. This demands at least additional observation and study, but it does fit the wider narrative.

 

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