by Michael J. Kosares
Up until now, the announced losses from the Swiss National Bank’s decision
to let the franc go have not been enough to cause a great deal of angst and
outright pain in the world’s principal trading houses. FT reports that
Citigroup lost $150 million thus far, Deutsch Bank and Barclays $50 million,
and FXCM, a New York currency broker, needed a $300 million “cash lifeline”
from Jeffries, the investment bank. Yesterday, though, things took a turn for
the worse when Everest Capital Global Fund, a Miami-based hedge fund,
announced it lost $830 million of its clients’ money in the Swiss franc
fiasco, according to a Bloomberg
report. That’s a very big number – one that wiped out the hedge
fund overnight and serves as warning that there could be more of this sort of
thing surfacing in the days to come.
What appears to have happened is that a good many hedge funds – how many
we really don’t know – thought they had the world by the tail with the Swiss
central bank pegging the currency at 1.20 euro. They could borrow
unlimited amounts of Swiss francs at very cheap rates, invest them in U.S.
Treasuries, for example, at a significantly higher rate without worrying
about losing on the franc/euro exchange rate. Add a good amount of
leverage and you’ve got the template for significant, risk-free returns – the
perfect, fool-proof trade.
Or so they thought.
When the Swiss National Bank pulled the rug unexpectedly last week, a good
many took a nasty tumble and what the resulting overall systemic risks might
be are now anyone’s guess. In reality, it wasn’t the world they had
by the tail, but a tiger and the tiger turned on them. As the
reports filter in, keep in mind too that the London whale numbers for JP
Morgan started small and ended big. As the Financial Times warned this
past Saturday: “Traders say hedge funds and global banks that
dominate the currency market may be nursing bigger losses. A major question
for the currency market and global regulators is just how far the fallout
extends, given the sheer scale of the Swiss franc’s appreciation.” (Not
to speak of the sheer number of traders who thought the ultimate trade had
landed in their laps)
When the markets open in Europe later on tonight, we may get a feel for
the scope of the damage. Too, it might take some days for the full
effect to be felt. Central banks no doubt will be scrambling to stop the
developing crisis in its tracks and waylay any contagion effect. At the
beginning of the month, in the “The Gold Owner’s Guide to 2015,” we warned
that “What forecasting inevitably fails to embrace is the surprise event, or
even the surprise policy, launched by one government/central bank or
another.” Who would have guessed not two weeks later, a central bank would
drop a surprise the magnitude of this one?
Of course our warning in that newsletter was delivered in the context of
owning gold as a portfolio insurance against such risks. As happened last
Thursday, you retire in the evening and all appears to be normal, or at least
as normal as can be expected in these precarious times. You wake up in the
morning only to find that the interconnected global financial village has
just gone over a cliff. One owns gold not because he or she thinks it might
turn a profit. One owns it to protect his or her portfolio against the very
same kind of unforeseen event that occurred last Thursday
For those of you just learning about gold, I might recommend this short
study as a primer:
Black
Swans Yellow Gold
How gold performs during periods of deflation, chronic disinflation, runaway
stagflation and hyperinflation
Excerpt:
“Black Swans, Yellow Gold is dedicated to those who believe,
like Nicholas Taleb, that it is just as important to prepare for what we cannot foresee
as what we can. Some might put their money on the latest Oracle
of Delphi or the contemporary reincarnation of Nostradamus — or even an
all-seeing eye plug-in that can be downloaded from the internet — but in the
end, such notions are the dreams of government planners and retired central
bankers. For the rest of us, a solid hedge in gold coins, as you are about to
read, is the more sensible and reliable alternative — a
wealth haven for all seasons.”
If you would like to broaden your view of gold market, we invite
you to sign-up here for
our regular newsletter and receive quality commentary like what you just
read. It’s free of charge and comes by e-mail. You can opt out at any time.
