Revisit REFCO – It’s Going to Get Worse

From Herald News Daily,

Refco Inc.‘s unregulated broker-dealer unit on Friday said it owes customers about $4.16 billion, some $486 million more than previously estimated by its parent, which has sought bankruptcy protection.

In Gold Mining and Non Recourse Loans I wrote

(Jim) Sinclair talks about derivatives and points out that when you have a buyer and a seller of derivatives and the price of the asset moves, then one side is an immediate winner and the other is an immediate and equal loser.

The greatest fear in this so called market for derivatives is the forced unlocking of the positions from total offset – one side a profit and the other a loss – to one account with the profit and another with the loss and both segmented from each other. (Emphasis added)

Sinclair offers further clarification tonight on his web site saying that the MSM is starting to treat the rise in POG seriously, even suggesting that the traditional items that accompany a rising price of gold are not present, e.g. inflation and a falling dollar. They note that gold is rising in all the major currencies, demand is higher, production is falling, hedge funds have been investing, but there seems to be adequate supply in central banks. They seem to sense that there is something else at work.

The fact that these items are treated in this manner is a clear statement that media and financial officals feel it is so dangerous that the financial public must never be informed (about the OTC financial derivatives). To fully inform would cause fear concerning what these financial weapons of mass destruction are capable of doing to the entire system.This would explain why there was an effort (with REFCO) to hold the assets of one account and not pay it out as was reported last week. This would be an effort not to split the derivative spread transactions with the loss debit in one account from the agreed (either directly connected account-wise or by the wink-wink method) from the offsetting side of the derivative with the credit. A $4.16 billion failure would be quite a small incident in terms of the risk of the OTC derivative spread monster present to all the entities using them.

I imagine that the number representing the size of what appears to be defined as a derivative explosion has one way to go and that is UP! I believe we now are getting a clear indication of the cause of the instantaneous meltdown of Refco (Emphasis added)

This debacle, which is known to insiders of the derivative trade, motivated the recent move in the price of gold to $552. Those that are presently using derivatives to smooth earnings, beat the corporate tax man or hedge commodities, recognize the danger they are exposed to by a bankruptcy anywhere along the daisy chain of the over-the-counter derivative spread market. All of this represents economic madness, meaning that gold is going to blast higher.

The system can camouflage one explosion, but what happens when the daisy chain of over-the-counter derivatives pulls a few players down together? This is why a meeting was held at the New York Fed concerning interest sensitive derivatives six weeks in advance of its planned date. This is why gold blasted to $552 and will do so again.

The greatest potential risk to the global financial system is over-the-counter derivatives. Expect more debacles in 2006 and 2007.

When you consider that central banks don’t have the gold that MSM thinks they have, but have leased out (which has been sold) 15,000 to 20,000 tons of gold. When you consider the derivatives written against gold. When you consider that Barrick has a paper loss of almost $3 Billion to $4 Billion. When you consider the combined Barrick/Placer Dome is short 525 tons of gold. When you consider 525 tons of gold is how much Russia wants to add to it FOREX reserves. When you consider that all of our national treasure of gold (8000 tons) is equal to 3 to 4 months of trade deficit, well, a sane person would come to the conclusion that the system is irrepairably broken.

REFCO Derivatives Mover Mike

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