The Gold Report: The Swiss National Bank surprised the world by unpegging the franc from the euro. You wrote that you suspect this will be identified as the beginning of the end and that when the derivatives market blows up, it will take down billions of dollars in hedge funds. Is this the beginning of the end of derivatives and hedge funds or the beginning of the end of something bigger?
Bob Moriarty: The beginning of the end of something bigger. With the Swiss franc tied to the euro, as the dollar went up, the euro went down. This required Switzerland to buy more euros to protect its currency. Switzerland ended up owning nearly as many euros as the country’s annual GDP. The Swiss National Bank got out before the European Central Bank (ECB) could increase its quantitative easing (QE).
The real key is the size of the movement. The best record that I’ve seen indicates a 38% move in the Swiss franc against the euro in 12 minutes. A move that big has never happened before in history.
TGR: Was the size of the movement driven by a kneejerk reaction to the surprise announcement? Later on, it settled out to something lower.
BM: The Bank for International Settlements showed $3.954 trillion ($3.954T) in Swiss derivatives. Somebody was long $4T and somebody was short $4T. As soon as the announcement was made, computer trading kicked in and blew out all of the positions that were short the Swiss franc. Essentially, a trillion dollars disappeared in 12 minutes.
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Compare that to the 3.25% rise in the U.S. Dollar Index on Jan. 22 and 23. That’s a $5.3T day in the currency …read more