I am going to post Patrick’s comment in its entirety, because it is very insightful:
What’s your long-term on gold? As the half-life between bubbles gets smaller, we approach a 1987 moment most likely where not just extreme volume ratios but infrastructure drop the market. Remember in 2008 it was metals in Feb/March, Grains in April/May, Energy in June/July and then finally a “bubble” in dollars as everything finally couldn’t hack it anymore and unwound. Maybe we’re approaching something similar but bigger… might want some allocated gold receipts to fall back on when those banking and money market deposits seem no longer beyond reproach, as in Sept. 2008
My counter-point to this instance is that the CDS is gapping up to track the sell-off in bonds rather than leading it as the leveraged speculator theory might suggest. As in any gamma-inducing, high-speed, mass-correlation, volatile event, on scales as short as intraday or as large as multi-year, the force driving it is the closing of positions, not the opening of highly leveraged speculative positions. The speculative positions are often in the minority and benefit quickly from the excess of larger, longer-term position clusters being closed out in panic or, as the case is often these days, an automated panic-once-removed.
That, to my understanding, is how the market works, massive inefficiencies build up and then get flushed out, it’s as natural as accidental death or unplanned birth. Shutting down hedge funds isn’t going to do a damn thing to stop financial Armageddon, you’d just be taking away a small fraction of the contributing volume. The only thing that can stop financial Armageddon is an abandonment of fractional reserve banking for interest-free credit clearing, but considering the entrenched oligarchies involve, I suspect we’ll need the ultimate wash-out first.
Note, while shutting down hedge funds or banning them would be trivial and medio-fascist, preventing “banks” with access to deposits, fractional reserve lending terms, and the Fed’s ZIRP discount window from doing practically unlimited leveraged speculation and front-running is a different story, that’s endemic enough that it can really exacerbate things. Caps on AUM might be reasonable, my reading of the LTCM story was that they were not only too big to fail, but too big to succeed, their positions simply could not be unwound gently in the event of a margin call. Position limits are also worth considering. Let’s just not throw the baby out with the bathwater, speculation plays and important role in the market, it checks the madness of the herd and at the risk of those doing it.
I was not thinking of shutting down hedge funds. What I was trying to say is that hedge funds should step back and think a bit. They should study the behavioural aspects of this situation. I also completely agree with the last paragraph of Patrick’s statement. He nailed it on the head.
Regarding gold. I have always been one to pooh-pooh gold. But after long discussions with other professional traders I have come to the conclusion that when everything else in the debate is removed, you have to go for whatever is left no matter how ludicrous. And right now left standing is gold! I personally don’t invest in gold, but I can understand (unlike my previous snickers) those who do invest in gold. I am diversifying using currencies. Namely I have started to purchase Canadian dollars.
BTW Patrick feel like writing blog entries? If so email me christianhgross at gmail dot com.