The derivative banking crisis will very likely happen, but it's not gold (like gold bugs claim) that will drive it. The gold market is tiny, compared to even stock market, not to mention forex and bonds. Frankly, this whole thing keeps me quite nervous. I posted this on the gold thread a while ago. The equivalent of what is going on in mainly interest rate swaps is what I would do if I played with 4,000,000 notional value with 5,000 in assets, i.e., bought (or shorted) 150,000$ worth of puts and calls on margin, having only 5,000 on my account. What has happened so far was SMALLER markets turned, with derivatives taking refuge in bigger markets. Now Forex (USD) turned, it's a huge market with 1-2 Trillion dollar volume, but the fact that bonds continue to rally bails out the banks, since interest rates market is even bigger (about 5 times). Once bonds get sold, I expect this game to be over.
Gold is doing what it supposed to do - a hedge against bad currency. In this case, the US dollar. So far, it has not experienced large investment demand, only to the extent as to not allow it to drop, as sagging jewelry demand would predict.
Usually, banks arrange swaps between 2 parties, for a small fee, so these derivative contracts are, in fact, compensated. What happens if the losing party does not pay? Then the fun starts... |
