Gold was down (at press time) $27.20 (-1.6%) for the week to $1,700.10, and silver was down $1.24 (-3.6%) to $33.07. Bloomberg attributed the loss December 4 to the “stalemate in US budget talks [which] drove commodities down.” According to Bark Melek of TD Securities, “Gold is being sold along with just about everything else in commodities with the worries on the fiscal cliff.” GoldCore noted December 6, “Physical buying of gold bullion has increased on the dip”—more on that below.
We are all cursed with economic Alzheimer’s these days, and so few will remember that not 18 months ago, similar negotiations in Washington were regarded universally as similarly cataclysmic. At that time, the politicians decided they would postpone Götterdämmerung until the end of 2012. One can hardly expect a much different resolution this time around.
For as Jason Hamlin, publisher of the GoldStockBull newsletter, tells the Gold Report December 5, “The true issue here is debt, not the fiscal cliff. Debt is the root cause of nearly all of our economic and social issues.”
And when will Washington address this issue? When limbo freezes over. Hamlin: “As it is a mathematic impossibility to ever pay off all of the outstanding debt, neither tax increases nor austerity will solve the debt crisis. As all money is created out of debt, and the interest owed back does not exist in the system, the only workable solution is liquidating or forgiving the debt.”
In the meantime, “I believe that another banking crisis could be on the horizon, driven by the large amounts of toxic derivatives and potential revaluation of assets that could render many big banks insolvent. The same kind of threat we saw in the 2008-2009 crisis is still hiding under the surface, as it was only papered over to buy time.”
That derivatives are toxic was known well before 2008. In 1994, one man, Robert Citron, bankrupted Orange County, California, by messing about with them. No one learned from this lesson because the bankers told us it was an isolated incident that in no wise demonstrated a systemic problem. And then they went hogwild on derivatives.
After 2008, the bankers took a different approach, best expressed by Homer Simpson, after he realized he faced doom after not studying for a crucial exam: “Actually, I’ve been working on a plan… I’ll hide under some coats and hope that somehow everything will work out.”
But all this twilight of the gods talk is a bit hyperbolic, no? Here’s economist Sheri Markose, in a monograph just published by the International Monetary Fund. “The analysis of this paper has one clear message. The global derivatives markets in the post-Lehman period, despite considerable compression of bilateral positions, are unstable, and they can bring about catastrophic failure. Quite simply, a threat of failure to any of the SIFIs [systemically important financial institutions, ie, the big banks] is an immediate threat to the others. The network topology where the very high percentage of exposures is concentrated among a few highly interconnected banks implies that they will stand and fall together. This topological fragility of the derivatives markets as risk-sharing institutions has an implicit moral hazard problem that undermines their social usefulness.”
What exactly is the “social usefulness” of derivatives, anyway? Their original purpose was as a hedge against risk, a form of insurance against such events as, say, a major increase in interest rates. Then the bankers discovered they could charge fat fees for these instruments. With the result, as the Economic Collapse website notes December 4, “Estimates place the notional value of the global derivatives market anywhere from $600 trillion all the way up to $1.5 quadrillion.” It’s hard to keep track of so many zeros; is that a lot of money? “Keep in mind that global GDP is somewhere around $70 trillion for an entire year.”
And keeping in mind the “network topology” mentioned above, Goldman Sachs has assets of $114.7 billion against derivatives exposure of $44.4 trillion. Economic Collapse reports, “Beginning next year, new [NASDAQ] regulations will require derivatives traders to put up trillions of dollars to satisfy new margin requirements.” As that would bankrupt the banks and usher in Götterdämmerung for real, these regulations will be conveniently forgotten, just as mark-to-market was. The website laments, “How in the world could we let this happen?”
Or as Homer Simpson put it, “Oh, I’m going to lose my job just ‘cause I’m dangerously unqualified!” The difference being that no one is threatening bankers with the sack just because they’ve reduced the world economy to a suicide pact.
In related news, ZeroHedge reports December 1, “Something appears to have snapped in the American psyche, as the last 30 days have seen the largest physical gold sales on record. Between the search volume for ‘bulk ammo’ and this, we fear something is afoot.”