GOLD’S BULL MARKET ISN’T OVER 161take the stock market down. Then that could start to blow out.
From there, interest rates could start to go up.
In turn, maybe a bank like UBS is in a swap agreement
with some hedge fund. It’s a fixed income swap, liable versus
fixed, and it has nothing to do with gold or stocks. But one’s
given the other some Treasury collateral, and, as interest rates
are spiking, there’s a margin call. Then the bank says, “You’re
supposed to have ten percent margin, and your collateral’s
worth less. Send us some money because you have to top up
your margin.”
So, the hedge fund sells what it can to meet the margin costs.
At that point, the hedge fund is selling good stocks to raise cash
to meet a margin call on a fixed income swap, none of which has
anything to do with gold. That’s how cascades unfold.
Like a earthquake that causes a tidal wave, the damage
has moved out from the source, and its hitting communities all
around the coastline that are very far removed from the origi-
nal earthquake. But these are the ripple effects that you see in
a highly interconnected system.
At that point, stocks would be crashing, gold would be spik-
ing, the repo market would be drying up and the Fed would
most likely be on the phone, trying to keep it all together. Soon
after, there might be a run on money market funds.
These are all real world scenarios and real network effects.
The problem spreads quickly to areas far removed from the
source of the problem. The essence of contagion is that the
problem is never confined to the catalyst. It just spreads and
spreads and spreads, and finds different channels, all of which
lead to dead ends.
■ Physical Gold versus Gold Miners
I’ve always talked about owning physical gold. By that I mean
gold bullion, not paper gold. I’ve also never recommended