Gold and silver still the best protection against the derivatives blow up that started with JP Morgan’s loss

The immediate reaction to the $2 billion and counting loss at JP Morgan has been a flight from risk trades and a sell-off of all financial assets, gold and silver included. However, investors ought to pause for thought about what this really means for the future.

If JP Morgan cannot get the derivatives market right what hope is there for any mere mortal. These are the guys that write the derivatives and ought to know best how to trade them.

Derivatives mountain

The global derivatives market is worth a multiple of many times global GDP. Gold guru Jim Sinclair has often pointed out that the perilous situation in the global derivatives market guarantees that money printing will have to move to a much higher level. This is where the global debt mountains are submerged and the only way to keep them underwater is to pile paper money on top.

Those selling gold and silver for paper money are making the wrong trade. They should be buying more at these low prices. All the risk is to the upside and trying to time a short-term market bottom and missing the uplift is likely to be far more costly than simply sitting this out or buying now.

For how long will it be now before the derivatives volcano errupts? It cannot be very long. The Greek exit from the euro which will almost certainly follow another election is not yet priced into financial markets. How can it be? Nobody knows how this will play out.

This is very reminiscent of the Lehman downfall that markets were supposed to have priced in before it happened. We know from the 2008-9 financial crash that markets had done no such thing. Is Greece another Lehman? Well the warning has been there for so long nobody is taking any notice anymore.

The 2008-9 precedent would be for enormous money printing in the wake of a eurozone financial blow-up. Really the authorities would have no other policy option and even the Germans would understand it by then.

Debt upon debt

Trading derivatives in a volatile financial market situation becomes inherently perilous because this mainly entails using leverage upon leverage. One slip and your equity is gone and the debt remains. Derivatives are the very epicentre of everything that has gone wrong with the global financial system in recent decades.

Only when this house of cards has fallen can things be put back together again. It will be done. Mankind has survived world wars, revolutions, plagues and depressions before. But don’t imagine it will be easy, except for the owners of precious metals whose assets will have enormous buying power in the final stages of this crisis.

Gold and silver are still the best protection against the derivatives blow up that has started with JP Morgan’s loss. You want to hold real assets, not paper money and its derivatives.