The “Grey Swan” of Interest Rate Derivatives

Gold Survival Gold Article Updates:

Jul. 11, 2013

This Week:

  • Telegraphing the Turnaround in Gold
  • The “Grey Swan” of Interest Rate Derivatives
  • Benny Boy Backtracks?

We’ve been a bit slack this week. Only one article posted on the website and a day late with our weekly email sorry. Also apologies if you’ve been experiencing trouble with the website loading. We are in the process of moving hosting servers so hopefully this will have some improvement.

While we mention it here is this weeks article. 

telegraphing the gold turnaroundAn informative piece looking at past corrections in gold and how long it took to make new highs. We may need a bit of patience according to history…

Telegraphing the Turnaround in Gold

Gold and silver are not much changed in NZ dollar terms on a week ago. Gold up $6 an ounce and silver down 19 cents per ounce. Mainly care of a stronger NZ dollar today at .7906 on the back of The Bernanks latest mutterings (more on that towards the end) which proved positive to gold and silver in US dollars this morning. See spot prices over to the right as usual. 

Gold is hovering around strong support areas we have pointed out in recent weeks…

We’ve read many opinions as to whether the bottom is in of late and they swing both ways. As always the choice on when to buy is yours and yours alone.


The “Grey Swan” of Interest Rate Derivatives

Last week we shared a short comment by Alastair Macleod on the fact that systemic risk remains very real still, largely due to the derivative tower.

A couple of days ago we stumbled across a comment on the Economic Collapse Blog on this same topic.

 “Do you want to know the primary reason why rapidly rising interest rates could take down the entire global financial system? Most people might think that it would be because the U.S. government would have to pay much more interest on the national debt. And yes, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has actually been much higher in the past), the federal government would be paying out about a trillion dollars a year just in interest on the national debt. But that isn’t it. Nor does the primary reason have to do with the fact that rapidly rising interest rates would impose massive losses on bond investors. At this point, it is being projected that if U.S. bond yields rise by an average of 3 percentage points, it will cause investors to lose a trillion dollars. Yes, that is a 1 with 12 zeroes after it ($1,000,000,000,000). But that is not the number one danger posed by rapidly rising interest rates either. Rather, the number one reason why rapidly rising interest rates could cause the entire global financial system to crash is because there are more than 441 TRILLION dollars’ worth of interest rate derivatives sitting out there. This number comes directly from the Bank for International Settlements – the central bank of central banks. In other words, more than $441,000,000,000,000 has been bet on the movement of interest rates.”


It’s worth reading the whole post, but the above contains the important numbers. Although we did note that this post said $441 trillion in interest rate derivatives whereas last week’s piece by Alistair Macloed said “only” $370 trillion, but what’s $71 trillion amongst friends!! (Actually the difference is just that Macleod only includes “interest rate swaps” and the economic blog has also included “forward rate agreements”. Given they are different types of “bets” on interest rates it’s probably reasonable to include them both but as we said already what’s $71 trillion when you’re talking $441 trillion!

Either way it’s a pretty big “grey” swan – not black since it would not be wholly unexpected if it came unglued.

Then this week we read a piece on Zerohedge showing the effects of rising rates on bank balance sheets already. 

“After crashing from $15 billion to just $6 billion, the reported balance of net unrealized gains is barely positive for just the first time since April 2011. And to think this number had topped out at over $43 billion in December 2012. But the worst is that monthly drop in “gains” of $24 billion is the biggest by a wide margin since the Lehman collapse.”


The chart shows this pretty clearly.

Although short it’s a bit of a jargony piece that requires some quiet contemplation, but the key takeaway is that the rise in interest rates of late has caused the biggest monthly drop in “Net unrealized gains (losses) on available-for-sale securities of commercial banks in the US” since the Lehman collapse.

Now we’re not saying the end of the banking system is here and now, but it does show you the precarious nature of the system, even when everything’s meant to be so rosy. We think more likely it shows that the Fed can’t afford to let rates run too far up from here. Time will tell but dialing back on the morphine is really not as simple as the pundits would have us believe.


Benny Boy Backtracks?

Speaking of the Fed, this morning the Bernank gave a speech and answered some questions after the release of the last months Federal Reserve minutes. The Fed meeting minutes supposedly showed that “About half of the Federal Reserve’s policymakers felt the U.S. central bank’s bond-buying stimulus should be brought to a halt by year end when they met in June, but many wanted reassurance the U.S. jobs recovery was on solid ground before any policy retreat.”


But it seems he may have backtracked slightly when answering a question following a speech he gave saying:

“highly accommodative monetary policy is needed for the foreseeable future and that the U.S. unemployment rate at 7.6 percent may be overstating the job market’s health.”


The minutes were the usual waffle and we wonder why we pay attention but we do nonetheless. This comment pretty much summed them up we reckon:

“We are not sure how you can go from ‘many’ needing to see labor gains before tapering begins to half seeing bond buying ending by year end. At the same time, ‘many’ other Fed officials saw bond buying into 2014,” said Adrian Miller of GMP Securities. “We are pretty good at math, but we are having trouble adding up the ‘many,’ ‘several’ and ‘about half’ to equal 100 percent.”


We still reckon the odds favour them printing for far longer than most expect. And if they don’t we will see some fireworks. Either way some indestructible derivative proof financial insurance in the form of bullion is likely a good option.

Something we beat Aussie to: Bail in!

Looks like the Aussies are following most other western nation now too:

Australia Plans Cyprus-Style “Bail-In” Of Banks In 2013-14 Budget 

While a Bail-in is not spelt out in so many words the Aussie Government budget for 2013-2014 in discussing the Australian Prudential Regulation Authority, (APRA) states one objective is to:

“consolidate the prudential framework by enhancing prudential standards where appropriate, in line with the global reform initiatives endorsed by the G20 and overseen by the Financial Stability Board;” (FSB)

The global reform initiatives include the bail-in methodology to handle insolvent banks. The budget document also goes on to say that:

“APRA will focus on implementing the new global bank liquidity framework in Australia…”

So while there is a bit of reading between the lines required here, it doesn’t seem a long bow to draw to conclude that Australia will also implement policy to handle insolvent banks via depositor haircuts. 

We asked the question back in April…Has New Zealand Been a “Test Case” for Depositor Haircut Scheme? Short Answer: “Looks Likely” 

We’ve seen Canada, US and the UK all with similar proposals, or methods hidden in budget plans etc, so no surprises that Aussie is also now rolling out the depositor haircut/bail-in methodology for dealing with what are now more innocuously referred to as SIFI’s (systemically-important financial institutions). Sounds much better than too big too fail doesn’t it?

(If all this is new to you then read some of the backstory as it pertains to New Zealand at the links below:

Bank Failures: Will New Zealand be Cyprussed?

If Cyprus Is the Bellwether, then Canada Is the Red Flag)

Of course the odds of a failure are “remote” but they are just preparing for it “just in case”. Wink Wink.

If you want some of that indestructible derivative (and bail-in) proof financial insurance we mentioned above well have we got a deal for you (sorry about the used car salesmanship)! We’ve managed to secure some lower pricing on silver bullion from one of our local suppliers. It’s not back to the level it was last year but is still an improvement on recent current pricing of 10% above spot price. There’s been many reports on the interwebs of silver shortages but seems they can still get a hold of some at the moment.

So orders of 99.9% pure local silver of 5kg or more can be made for spot plus 7% plus ingot charge of $13.80 and delivery is about a week away.  Not quite back to the 5% + ingot charge it was but an improvement anyway. If you’re keen on some at what are still very low silver prices get in touch.

1. Email:

2. Phone: 0800 888 GOLD ( 0800 888 465 ) (or +64 9 2813898)

3. or Online order form with indicative pricing 

    Have a golden week! Glenn (and David) Ph: 0800 888 465 From outside NZ: +64 9 281 3898 email:

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This Weeks Articles

Why NZ’s Interest Rates Could Stay Low For a While Yet
interest rates2013-07-04 21:51:15-04Gold Survival Gold Article Updates:  July 3, 2013 This week: Are We There Yet Poppa Smurf Systemic Risk Remains Very Real Speaking of Interest Rates  Now versus the 70’s   Another week, another tumble. This commentary is getting all too repetitive now with the sharp fall for gold and silver continuing last Thursday and Friday […]read more…
Telegraphing the Turnaround in Gold
Gold Turnaround2013-07-08 20:03:16-04As the cliche goes, history doesn’t repeat but it does rhyme, so looking to the past to at least give some hints as to what the future holds is often a useful tool. So read on for an empirical look at the current correction in comparison to previous corrections both in the current bull market and also […]read more…

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3 thoughts on “The “Grey Swan” of Interest Rate Derivatives

  1. Glenn says:

    Hi Atom, thanks for the heads up – we might make a mention of that this week too.

    Not quite right of them to say “New Zealand has joined with Europe, the USA, the UK, Canada, and Australia, in preparing to “bail-in” its banks”, as after all we were at the head of the pack when it came to the “haircut”! That timeline is quite useful for anyone who hasn’t followed developments closely for the last few years too.

    Thanks again for spotting this.

  2. Pingback: Timing the bottom in gold | Gold Prices | Gold Investing Guide

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