Commodity Trade Mantra

GOLD – The Only Saviour from the Dangers of Derivatives

GOLD - The Only Saviour from the Dangers of Derivatives

GOLD – The Only Saviour from the Dangers of Derivatives

For many years we have warned of the dangers of derivatives.  We were laughed at leading up to the 2008 financial debacle when Lehman broke and nearly took the entire system down.  That turned out to be no laughing matter and here we are again at exactly the same situation where derivatives threaten to melt the financial system again.  The difference now of course is the “saving ammunition” has already been spent where sovereign treasuries and central banks have destroyed their own balance sheets.

  Two weeks ago, the Fed announced a “48 hour stay in place” provision for collateral of any derivative contracts where the big banks are involved.  The idea here is to prevent collateral being pulled by the survivor for 48 hours should the bank counterparty become insolvent.  This will give the Fed a window of time to get the fire hose of liquidity out and reliquefy a large bank’s balance sheet before they can break the derivatives chain.  But what does this really do?  Does it make derivatives any more sound or does it really just add more risk to central bank balance sheets and thus the currencies themselves?

  It is very important to understand just how important derivatives have become.  Derivatives have been used to push, pull, manhandle and outright price many global markets.  They have been used to paint a picture as “proof” the Alice in Wonderland markets are in fact real.  Not even one single market can get out of control because “truth” anywhere will lead to TRUTH everywhere!  Even one single market left alone to Mother Nature will lead to questions that cannot be logically answered.

  First, these provisions being proposed by the Fed are not set to begin until August 2017.  I cannot imagine markets holding together this long, in fact, I would give less than 50/50 odds the U.S. actually has an election this November, rigged or not.  Next and more importantly, the Fed is actually saying “we will be the backstop” to ALL of the derivatives given the 48 hour window to “fix” the problem at a specific bank.

  It does need to be pointed out, if any derivative of any size does fail then someone, somewhere, is “exposed”.  In reality, since few if any of the derivatives can actually perform …the entire world is swimming naked and already completely exposed!  How can I say this?  Forget about CDS on something as unpayable as a U.S. default, can the big banks really pony up $300+ billion if Greece were to fail?  The real number is probably 10 times this amount as “neighbors” are allowed to purchase insurance on their neighbor’s home.  What better incentive to strike a match?  Or what about another 10 times that amount if Italy defaulted?  My point is this, EVERYTHING, EVERYWHERE is “insured” via derivatives.  Many markets and assets have more (or even many times over) “insurance” than the actual market has value, the “coverage” is simply unpayable.

  The only response to a breakdown of derivatives will be exactly what it always has been, print more and more via QE or other method.  This is obviously destructive to currencies as they will be diluted to zero.  Whether you look at this picture from the micro standpoint of individual currency dilution, or from the macro standpoint of “solvency” …all roads will lead to gold.  Real physical gold cannot be diluted nor can it default.  Gold will be viewed for exactly what it is.

  We have said gold will be the “last man standing” in a failure chain of fiat currencies, it will also be viewed as the ONLY protective hedge in a world completely unhedged.  As it stands right now, the belief is that everything is hedged …in reality NOTHING is hedged.  Once it becomes understood that no insurance anywhere has the ability to pay up, the world will collectively “change insurance companies” and move toward the only one with the ability to pay, GOLD!

  Switching gears but I believe very connected to the above, what is to be made of Deutsche Bank offering 3 month accounts paying an annualized FIVE PERCENT interest?!!! 

Liquidity Problems? Deutsche Bank Offers 5% Yields If Depositors Lock Up Their Money For Three Months  To state the obvious, Deutsche Bank needs money (liquidity) badly and they need it now!  Think about this, why would they do such a thing in a world where nearly a third of all debt carries a negative interest rate?  Why didn’t they go to the ECB’s feeding trough and snort up some zero percent funds?  Or, why didn’t they just go to the market place and issue bills for 90 days at 1/4% or less?  WHY WHY WHY?

  Unless DB is pulling some sort of late April fools joke, they obviously need money and are “willing” (being forced) to pay 5%.  Is it possible they have been shut out”?  Please remember, DB pleaded criminally guilty to manipulating the gold and silver fixes.  Part of their alleged settlement was turning state’s evidence and aiding regulators in tracking down other perpetrators.  Is it possible the clan of monster derivatives banks is a very small club and Deutsche Bank “ain’t a member anymore” because they turned rat?

  Other than not having access to capital anywhere else, I cannot think of any reason they would offer 5%?  If this has become their only source of funding then we just learned something very interesting.  This number of 5% is the REAL and unsubsidized interest rate!  Do you see the ramifications?  The world has “valued” everything with a basic discount rate of “0%”, what does it mean if rates to raise real capital from the markets is 5% rather than free?  Might stock markets be overvalued? …and real estate? …not to mention the foundation to EVERYTHING …BONDS???

   This certainly bears watching because if Deutsche Bank has been kicked out of the gentlemen’s club, they have been allowed to carry the red button kill switch called derivatives with them!  I am not really sure what to make of this all.  Surely the powers that be would not kick the largest (or second largest) holder of derivatives off the reservation, would they?  The only possible reason I can imagine is something has already blown up behind the scenes that is too big to be fixed or hidden.  The “blame” for a financial meltdown may very well be hoisted around Deutsche Bank’s neck!

  To finish, please do not roll your eyes at this.  If you have a logical explanation as to why DB would offer 500 basis points for three month money if they could get it cheaper elsewhere, I would love to hear it!  Anyone who tells me Deutsche Bank is making this offer because they feel sorry for the elderly savers earning nothing on their life’s savings will go into my spam box forever.




Courtesy: Bill Holter

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