Kaye:  “I’m focused right now on the fact that the gold price has been relatively strong.  Generally we see very thin trading in August.  In fact, most of the trading that is recorded in the markets is algorithm trading.  In other words, it’s Goldman Sachs algorithm trading with JP Morgan, and then they switch roles the next day.

This is well known in the industry, but it’s not well known to investors.  So most of the liquidity that appears to be present in these markets is in fact nonexistent.  It’s phantom liquidity provided by these high frequency trading algorithms....

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“We are in a position where if the powers that be want to suppress things one more time, they probably would have the ability to do it because of the thinness of the markets.  I would look for a serious push higher in the first week of September when the battle of true liquidity will be joined once again.”

Eric King:  “Bill, yesterday in his interview on KWN John Embry was warning about derivatives and the possibility that we have major problems happening behind the scenes right now that are a serious danger to the stability of the financial system.  What are your thoughts on the derivatives situation as it relates to interest rates?”

Kaye: “John has a lot of credibility.  I can tell you that the the leverage in derivatives is absolutely enormous.  People just don’t understand how staggering the leverage is inside of the derivatives complex.

So there are entities with bets on higher interest rates in place, and this is against other entities that are betting interest rates will remain low or even head lower from here.  The fixed income markets are massive.  And everybody says, ‘We are delta-hedged’ and all of this other nonsense.  But having run an arbitrage operation and having had to be dealt a hedge, I can tell you that nobody is really hedged, they just say they are.

There is serious concern at the moment over derivatives exposure because of the move higher in interest rates.  So there are probably entities who are screaming right now because of what has taken place in the interest rate markets.  And if they had to actually report, as opposed to just papering over in some fashion, the mark-to-market losses that they are experiencing, this would not only be extremely painful, but possibly it would possibly destabilize to the entire financial system.

In other words, one thing central planners can’t allow is for the ‘too-big-to-fail’ to appear to be failing again because that’s a very slippery slope.  Confidence in banking is everything.  Everyone now knows, particularly after 2008, that the financial system has far too much leverage. 

As soon as the people lose confidence in the system, panic will ensue, and so that just can’t be allowed to happen.  The system would implode again, and this time it would be much more serious than in 2008 because the sovereigns no longer have the firepower to bail everybody out.  That’s what is different now.  I don’t know precisely what is happening behind the scenes right now, but I would imagine it to be quite chaotic.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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The audio interviews with Michael Pento, James Dines, William Kaye, Grant Williams, Dr. Paul Craig Roberts, Gerald Celente, Hugo Salinas Price, Chris Powell, David Stockman, Art Cashin and Marc Faber are available now. Also, other outstanding recent KWN interviews include Jim Grant and Felix Zulauf to listen CLICKING HERE.

Eric King

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