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Global markets show trouble

In my mind, the primary reason to own physical precious metals such as gold or silver is as “insurance” against the risk of loss in the values of paper assets such as stock, bonds, and currencies.

Twice in the past two weeks, global financial markets almost seized up. If they had, you might have started your day on Thursday, May 7, or Tuesday, May 12, without realizing that you might not have been able to access your bank account or use your credit or debit cards.

I doubt that more than a handful of you are even aware of what happened in Asian and European markets mostly while they slept those preceding nights. By the way, does it bother you as much as is does me that almost all American media failed to cover this news?

Starting at 6 p.m. Eastern in the U.S. on May 6, which was Thursday morning May 7 in Asia, there were a number of minor negative developments around the world. Chinese equities traded lower in response to a government crackdown on margin trading improprieties. The Japanese government 10-year bonds experienced their largest one day interest rate increase in two years. Even India’s long bond interest rates rose. Stock markets across the region fell as businesses faced higher interest costs on their debt.

Problems built in European markets. French, German, Spanish, Italian, British, and Irish 10-year government debt saw bond values decline, with interest rates hitting their highest levels since last year. European stock markets also fell, with all major indices down more than one percent.

Of particular concern was the 30 percent increase in the German 10-year bond interest rate. German bonds are the safest and most stable in Europe. Yet, the financial concerns about Greece, Austria, France, and other nations have pushed the German interest rate over the two weeks preceding May 7 from less than 0.1 percent all the way to 0.76percent on that day. This was the largest two-week surge in Germany’s interest rate since the unification of West and East Germany in 1990.

These growing losses triggered massive liabilities for sellers of derivatives contracts. The Euronext Derivatives Market, on the brink of collapse, announced a shutdown of their operations shortly after 8 a.m. Eastern time. When it reopened 30 minutes later, trillions of dollars of derivatives had been created at tremendous financial losses to bring stock and bond values most of the way back to prior levels.

As a result, the world’s financial system did not crash on May 7.

A similar, nearly as massive, market cataclysm again occurred last Tuesday morning in Asian and European markets. While the Euronext Derivatives Market was not forced to shut down that day, worldwide financial markets could have once again frozen.

In response, especially to turbulent bond markets (totaling approximately $200 trillion globally and almost certainly in the quadrillions of dollars when their related derivatives contracts are added), precious metals did well last week. Gold was up a solid 3.6 percent and silver jumped 7.6 percent!

If you have been waiting for the “right time” to begin or to continue building your holdings of physical precious metals, you may not have much time left to take action.

The global financial markets are getting more distorted with every passing day. Can a worldwide collapse be prevented next time? And, are you already prepared to get by when/if, at a moment’s notice, you no longer have access to your bank balances and are unable to us your credit or debit cards?

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com.

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