Recent Gold Reserve Movements

Central banks have moved gold reserves in unusual ways. The following transfers were reported:

According to the World Gold Council's latest survey, the share of central banks that moved more of their gold home has almost doubled since last year. The share of central banks spreading their holdings across more overseas vaults has jumped fivefold.

The author states that central banks do not usually make such sudden moves with their gold reserves. The Dutch Central Bank stated in its press release that moving its gold improves the tradability of its reserves. It said this would allow it to be better prepared for severe crises.

In July, the European Central Bank announced a major change to its enhanced euro facility. ECB President Christine Lagarde said that financial market stress is likely to become more frequent. She stated that the ECB had to prevent that stress from triggering fire sales in global funding markets.

The Bank for International Settlements

The author identifies the Bank for International Settlements (BIS) as the institution that connects these central banks. The BIS was established in Basel, Switzerland, in 1923, according to the source. Legal scholars, based on academic studies, have argued that the BIS comes closer than any other organization to being the world's bank regulator. Many have therefore called it the central bank of central banks.

The author argues that the actions of the BIS explain much of the behavior of financial institutions worldwide. Last year, the BIS published a report that received little attention. The author states that the report provides a blueprint for what the BIS calls the next generation monetary and financial system. The word "elasticity" appears repeatedly in the report.

Elasticity and Liquidity

Elasticity is a established term in finance. The first line of the Federal Reserve Act, which created the US central bank in 1913, states that the Federal Reserve was set up to furnish an elastic currency.

The Federal Reserve Act followed the Panic of 1907. The author describes that panic as roughly equivalent to the 2008 financial crisis, in the early 1900s. An elastic currency was intended to prevent a repeat. Under this concept, a central bank expands the money supply when the system needs it, such as during a banking crisis. It then reduces the money supply when conditions return to normal.

The author describes liquidity as the oxygen of the financial system. It goes unnoticed while present, but its disappearance causes the system to fail.

The author lists the following liquidity crises in the last 100 years:

• 1929
• 1974
• 1987
• 2001
• 2008
• 2020

The author states that each crisis had different characteristics and causes. The financial crash in each case resulted from one common factor: a lack of liquidity.

Current Signs of Liquidity Tightening

The author states that liquidity is tightening again. Last week, the International Monetary Fund (IMF) released its financial stability report. The report stated that financial risks are high and that underlying vulnerabilities could be exposed during a crisis. The author concludes that liquidity crises have not disappeared and that the heads of major financial institutions are aware of this risk.

The author notes that the S&P 500 has risen while other market segments have weakened. Junk bonds have recorded their sharpest decline in several years.

Federal Reserve Policy

The Federal Reserve raised its interest rate last month for the first time since 2023. Market expectations suggest that the Fed will likely continue raising rates in the coming months.

The author states that higher interest rates reverse the elasticity described above. Higher rates make money more expensive and drain liquidity from the system. The Federal Reserve raised rates before the last two major economic crises, including 2008. It also raised rates in the months before the Great Depression began. The author describes Federal Reserve rate increases as the most consistent leading indicator of liquidity crises in history.

Global Monetary Tightening

The author presents a global monetary policy tracker showing how many major central banks raise rates at the same time. A higher line indicates more central banks raising rates. The author states that nine out of 10 central banks are raising rates in 2026.

The author argues that this constitutes a coordinated global monetary policy effort. The author states that these central banks are directly or indirectly influenced by the BIS, which has openly discussed a new monetary and financial system.

The author asks why institutions preparing for a liquidity crisis are simultaneously tightening the financial conditions that could cause one.

Comparison With the 1920s

At the 2026 World Economic Forum in Davos, Larry Fink, Ken Griffin, and Christine Lagarde drew comparisons between the 2020s and the 1920s. The 1920s are known as the Roaring Twenties. These leaders suggested that the current period resembles the Roaring Twenties.

Participants described several parallels, including a major boom with a technology component and monetary issues in both periods. Lagarde compared today's AI revolution with the electricity and assembly line developments of the 1920s. She noted that the stock market was performing strongly in both periods. She stated that she intended to compare the technological breakthroughs of both decades. These included the size and scope of the electrical grid, the combustion engine and its development, and the assembly lines.

The author states that the 1920s boom was fueled by optimism about electricity and new technologies. That boom also produced excessive market speculation through leverage, stretched asset valuations, and a highly vulnerable financial system. When conditions that stretched the system reversed, the largest liquidity shocks occurred. The author states that this is what happened after the 1920s.

The author argues that the current stock market price pattern nearly replicates that of the 1920s. The driving force today is optimism about AI rather than electricity.

Leverage and Circular Financing in AI

The IMF's financial stability report highlights valuation risks and the potential for an AI-driven market correction. It states that leverage is rising across the AI ecosystem. Circular financing arrangements tie AI companies more closely together. The report states that rising leverage increases the potential for forced selling. The BIS has warned that the financing of AI is increasingly leveraged.

The author cites the following examples:

• Nvidia invested $30 in OpenAI, and OpenAI fills its data centers with Nvidia chips. The author identifies this as the circular financing the IMF describes.
• In the second quarter of 2026, Amazon recorded a gain of more than $53 billion, mainly from its stake in Anthropic.
• Alphabet recorded $98 billion from the rising value of its shares in other companies.

The author states that these examples connect directly to the BIS concern that AI financing is increasingly leveraged and concentrated. The author compares these conditions with the 1920s. Circular financing in electric utility companies was prominent in the 1920s. Leveraged financing was also a key feature, as were elevated asset prices.

Feedback Loop and Policy Timing

The author argues that if left unchecked, the combination of leverage, circular financing, and excessive optimism tends toward extremes. The author states that the AI race has grown more extreme as the Federal Reserve kept interest rates low over the past two years. Concern is rising about the consequences if this activity collapses. The author states that the only way to test this is to let it break and then address the resulting damage.

Central Bank Interventions and Gold Collateral

The author states that central banks may be triggering a crisis while preparing for one. The movement of gold back to home countries is a key part of this preparation.

The author notes that the size and speed of government and central bank interventions have increased with each crisis. The 2008 intervention was large but did not prevent severe economic damage. During the pandemic, the response was faster and the stimulus was larger. The author describes this trend as institutions determining how elastic the currency must be to avoid economic pain.

The author argues that an unwind of AI-related excesses could prompt an even larger and faster response. Central banks would need to use gold reserves as collateral to obtain additional cash for injection into the economy. The author states that larger and more accessible gold holdings provide more capacity to respond to a liquidity crisis.

The author states that institutions recognize the risks in the current financial system. The author argues that, although institutions do not state this explicitly, today's economy closely resembles that of the 1920s. The 1920s followed a pandemic in 1920. The author states that current financial market behavior and technological optimism are similar to those of that period.

Outlook

The author states that the Federal Reserve's rate increases set the conditions for the period ahead. The author expects that government and central bank responses will be quicker and larger than in the 1920s. The author concludes that another Great Depression is unlikely. The author also states that history indicates central bankers have not yet found a complete way to avoid liquidity crises.

The author notes that in the 1920s, the Federal Reserve began raising rates in early 1928, tightening financial conditions. The stock market continued to rise for another year and a half, as higher rates did not immediately affect the economy. The author states that a similar pattern may be developing. The author argues that the Federal Reserve has only recently begun raising rates. These increases are unlikely to have a considerable effect on the economy for at least a year. The author concludes that the stock market may therefore continue to post strong returns, supported by optimism about AI.

Reported Trading Results

The author reports the following results from the strategy discussed:

• 2025: 16 trades on the Nasdaq 100 using QQQ and TQQQ, a leveraged ETF. Three large trades generated all of the strategy's returns and captured the full upward move of the Nasdaq 100 in 2025. Some positions lost money. The trades produced a 49% return in 2025.
• First half of 2026: Four trades. One trade produced a 35% return by capturing the rally in April and May.
• Current position: The market has become more volatile since then. The strategy is in cash, awaiting the next entry opportunity. The author expects that opportunity as the Nasdaq approaches its 200-day moving average. The author expects this average to hold and allow the market to continue rising.