The trick to gold investing, and every type of investing, is to buy while the attention is elsewhere. Posted by James Randolph on February 27, 2012
Gold Investing During the Derivatives Bubble
February 27, 2012 – The trick to gold investing, and every type of investing, is to buy while the attention is elsewhere. Even with recent record prices and a ten-year bull market, gold is still a relatively small market and a relatively segregated market. Gold makes the news quite often, but the actual market itself is miniscule compared to, for instance, the derivatives market. When George Soros says gold is the “ultimate bubble,” he may have another meaning in mind, because clearly derivatives are the ultimate bubble and he is currently buying gold.
There are $707 trillion worth of OTC derivatives in existence on the open market, with $107 trillion of those coming into existence in the early part of last year. The derivatives bubble, which in many ways mirrors the role the real estate bubble had before 2008, has never stopped growing. It would take the entire world’s gross domestic product, or earnings, for 11.6 years to buy or pay off all the derivatives now in existence. Derivatives are a shadow market that is ballooning to such a proportion that it threatens the health and stability of all markets.
The term derivative literally means that the “value” of the financial instrument is “derived” from goods that are completely independent of the instrument itself. This means that for the first time in history we have created a financial instrument that is literally worthless. Fiat currencies, or paper money, at least have some value as a store of confidence and medium of exchange. Derivatives are literally worthless.
And this explains why it is so easy to flood the world with $707 trillion worth of derivatives. Something that is “derived” from another thing and has no value whatsoever should be pretty easy to come by, especially in the era of digital representation. With the press of a few buttons, Wall Street has managed to create a market that is endangering the world.
Gold investing may be the bright light at the end of the derivatives tunnel. Gold is the absolute antithesis of a derivative. It is the historically honored store of wealth and has an inherent value totally independent of the health of any market. It is also a store of confidence and a medium of exchange between people. Gold is as real as it gets.
Compared to derivatives, gold is incredibly undervalued. Considering that derivatives are clearly in what we call a bubble, or irrational popularity, the derivatives market must necessarily burst at some point. When it does, gold will be the natural place for investment as it has been a safe haven currency for thousands of years. Nobody knows when the derivatives bubble will burst, but we should have learned enough about bubbles and the habits of Wall Street by now to know that anything you cannot physically hold and own should not be trusted. When the derivatives bubble goes, those who did some gold investing will own the show.
Senior Staff Writer – Certified Gold Exchange