Reply #106: Prudent Squirrel: Will Derivatives Wipe Out Some Currencies? [View All]

http://www.kitco.com/ind/Laird/sep062007.html

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Now, given the fact that I don’t think Central banks can escape having to monetize more and more trillions worth of derivatives, the question arises ‘what will be the fate of major currencies?’

Central banks have a serious dilemma. If they let the financial system ‘take’ the losses, the credit markets freeze. That will just hammer world economic activity. If central banks do monetize all these growing losses (likely to snowball) then they threaten their own currencies. Both choices are quite bad. Can they work out of this mess? I don’t know. One thing for certain is they will have to act very soon. I think a consensus is building, that, as people begin to understand what is happening, they are going to start dumping some of the major currencies where the derivative losses are centered.

Ultimately, gold should benefit greatly in this situation, although it is subject to some panic selling when institutions need cash during equity crashes.

Also, considering the weakening US, Japanese, and EU economy due to credit contraction, we have one hell of a financial storm building on the horizon. It is a huge black cloud looming on the horizon in front of us. I can see no good reason to be staying in equity markets right now. Cash is definitely king at this time. (gold and precious metals are likely the best cash).

One final note, there has been some talk going around that commodities in general should benefit significantly as these currencies start to have trouble. One major reservation I have about that is that commodities are so sensitive to economic activity. If things really get out of hand in the financial world, I expect some significant economic slowing and falling demand for all the major commodities, and even possibly oil. The world equity bubbles are the only thing still keeping people spending. If those tank, the last standing source of profits for people is likely to start to evaporate. This is not going to be good for commodities.

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