We have sometimes questioned exactly what Jim means by this. He said that he has been aware for years, and has discussed with us, inherent flaws in the financial markets, and the impending turmoil that was inevitable. Credit and debt are the foundations of our economy. Due to complex fnancial instruments, (derivatives, aka SIVs,) expanding beyond all logic and control (they are unregulated) we have entered unchartered financial waters in recent years. These are unprecedented conditions. The systemic dislocations have never been this great. Neither he nor any of the people he has been educated by, past or present, have ever witnessed anything of this kind. Now the credit markets have broken down with no viable solution for fully repairing the damage, and the damage is spreading from one financial asset class to another. This is the peril that he foresaw happening, and he knew that gold would benefit and protect its owners when this scenario unfolded. Once the credit implosion began he alerted us that “This is it:” the peril he had expected was now a reality.

Here is a simplified example of the way derivatives play out: As Jim has said before, these contracts are structured so that the performance of the contract is dependent on the solvency of the person who is on the losing side of the transaction. I.E. this is already a flawed “investment.” He says that if you were to buy a soybean contract and the investment went against you, you would get a margin call. In derivative contracts, however, there is no margin call. The investment simply goes against you, and suddenly trucks start arriving, dumping loads of soybeans on your yard. And you are obligated to pay for them, even though you don’t have the money. While this may be a bit of a simplistic example, Jim said it gave the general idea of how these transactions work and what a hopless mess is created.

Jim says that derivatives at this point are basically all “busted” and many have been for a long time, plus they have no real market. The grantor and grantee are the only parties who can “take off ” or liquidate the contract, but in most cases the originators have resold the derivative to other people, who may have in turn done the same. He says the inventors of the OTC derivative in 1992 were eventually jailed, as the transactions were deemed to be illegal and fraudulent, as too little money was creating too large a sum for the “investment.”

I am not sure how we moved to the place in the financial world where these instruments were allowed, and actually sanctioned, based on the information I have provided above. Either Jim didn’t explain that, or I didn’t catch that part. In any case, SIVs are little better than a ponzi scheme, and now the genie can’t be put back in the bottle. A lot of “investors” have the proverbial yard full of soybeans and the trucks are tooting a merry salute as they drive away!