Big Banks’ Exposure to Derivatives Worse Than Ever

October 9, 2012

It has generally been accepted that derivatives are problematic financial instruments. Warren Buffett has called them “financial weapons of mass destruction” and he refuses to delve into them because he, of all people, simply cannot understand them.

That’s what makes this recent report that bank exposure to derivatives has skyrocketed all the more worrisome.

Given the lessons of 2008-2009, one would have hoped that banks would have backed off of derivatives. Today, US banks exposure to derivatives lies at $225 TRILLION. That is up from $120 TRILLION just six years ago.

This poses a great deal of risk to the banking system. The outcome is uncertain at best. It behooves investors to diversify into assets that are not vulnerable to a derivatives meltdown, namely gold. Gold is REAL and is thus not subject to the forces that could literally destroy the value of financial assets in a derivatives meltdown.