06/11/2012
Earlier
today King World News published the extraordinary chart sent
exclusively to KWN by Egon von Greyerz. In part II of his interview,
Greyerz, who is founder and managing partner at Matterhorn Asset
Management, discusses the incredible chart, and gives readers a shocking
price for gold which is based on that ‘cubed’ chart.
Here is what Greyerz had this to say in Part II, along with his
comments about the fascinating chart: “I discussed the real
over-the-counter derivatives earlier, which stand at $1.1 quadrillion,
and this is worldwide. Every time there is a problem in a bank it seems
to be derivatives related, such as what happened with JP Morgan which
recently lost $5.6 billion, and UBS which lost $2.3 billion.”
Egon von Greyerz continues:
“They have young people, many times in their 20s, coming in and
having derivatives positions of tens of billions or even one hundred+
billion dollars, and these young people have no idea what they are
doing. The individual from UBS, who is now defending himself, said, ‘I
just came in to run these positions. I had no idea about this market.’
He is only 27 years old.
So you have inexperienced people taking massive risks, and running
positions which amount to an unthinkable total of $1.1 quadrillion....
“Every time we look at these positions closely and value them, which
is when there is a problem, the banks realize the positions are not
worth anywhere close to what they believed they were. The real,
underlying problem is that even management at the banks don’t understand
these derivatives. They don’t know how to value them, so they have no
understanding of the true value of the positions.
Many times they are virtually impossible to understand, therefore the
traders can value them at whatever they want. Of course they are
unregulated and they are not traded on any exchange, and most all of
this is held off-balance-sheet. Meaning they are not included on the
banks balance sheet.
What the banks do is net down the positions to a very small total
because they assume that counterparties will pay. Well, we know when
something happens in the banking world, take Lehman as an example, and
we will have many more Lehmans in the future, the counterparty doesn’t
pay or isn’t able to pay.
What that means is the gross remains the gross, and again, we have an
outstanding exposure, worldwide, of an unfathomable $1.1 quadrillion.
You also have to realize that there are virtually no reserves against
these enormous positions.
This is why investors that hold major assets in banks are taking
risks they shouldn’t take. The reality is the banking system is
incredibly fragile because of the ongoing risk of the derivatives bubble
blowing up at some point. I would add that the risk of this happening
is very high in my view.
This is the reason, as I’ve said, that investors have to hold assets
outside of the banking system. Let’s take a look once again at the cube
chart, just to look at the proportion of outstanding derivatives to
gold:
You have $1.1 quadrillion of derivatives, and all of the gold ever
produced, which is in one corner of the chart, is $9 trillion. If you
take the gold said to be held by central banks, which assumes the
central banks physically possess the 30,000 tons and I don’t believe
they have anywhere near that, but hypothetically speaking, if they did,
it is only $1.6 trillion worth of gold.
You can see in the above chart that the central bank gold only fits
into a tiny corner of the cube. So what I am saying with this chart is
if there is a derivatives blow up, you can only imagine the amount of
money that would need to be printed. And, again, I think there is a
very high probability of a derivatives blow up taking place.
If you then related the enormous derivative position to the
percentage of gold allegedly held by central banks, if gold were to
reflect that, you are not talking about gold at $10,000 or $20,000, you
are talking about gold well above $100,000 an ounce. This is what
investors must focus on in terms of the bigger picture for gold.”
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