Friday, July 15, 2011

Gambling on Gold and Silver

With so much money printing over the past 10 years, financiers have had trouble in finding ways to put this free money to good use.

One fancy creation was a derivative called the credit default swap which morphed into a 'naked' credit default swap. "Credit default swaps, where you insure your neighbor's house just to destroy it and make money from it..." said German chancellor Angela Merkel back in March 2010. Quite a good idea if you can make it work and get away with it.

So these little bombs work like this. You 'enter a contract', in a 'naked' sort of way. That is, you don't even have to own the debt instrument. Which, for example, in Greece's case is a Bond. Furthermore, you short the debt market the contract is signed against. Meaning, you get paid out when your derivative goes down in value.

So you are betting that the nominated debt market will crash, thereby giving you a goodly sum of money from the other side of the bet. The other side of the bet being the insurance companies, like AIG.

This is probably why European politicians are a bit concerned by credit default swaps. BullionVault estimates the total CDS insurance cover for Greece's debt is $US600 billion. Quite a big lottery winning don't you think?

If this needed to be squared of with the 'naked' winners then all hell could break loose. Nobody quite knows which Banks in Europe and beyond would be exposed. Perhaps this is why the 'powers that be' are trying to get Greece's default to not look like a default.

But betting isn't all about gambling; in the strict sense of the word. It could be argued that the holders of gold and silver are betting against fiat currencies and economies in general. But that would be a little harsh.

Much betting doesn't take too much 'homework' to figure out which side to place a bet on. Random lottery numbers come to mind. However, doing your homework on the credentials of gold and silver takes a lot of hard work; and sometimes stress in order to come to buying and investing decisions.

For one, you are often alone amongst your peers when appraoching the whole gold verses fiat argument.

Could purchasing bullion be seen as a type of 'short' against economies growing? May be. If you listen to some precious metal commentators, you can get the impression they are 'willing' the economy to disintegrate. This so the value of their precious metal holdings increase in value making them very wealthy indeed.

However, the general view amongst gold and silver investors, is that buying gold and silver gives you the best option of preserving the wealth you already have; and may be, with silver especially, getting a return on that investment.

No gambling required, just common sense.

[NB: At the bottom of this blog site, I have included the six attributes of money]

Gold in New Zealand dollars: $1884.06 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $45.39 per oz
Previous all time high: $59.19
per oz

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The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001
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