May 18, 2012

Eric Sprott on derivatives and problems

Eric Sprott of Sprott Asset Management is worried what could happen during market declines when derivatives trigger. He said that there is no underlying wealth creation of these things. There is always a seller and a buyer. The thing is which could explode if the contract must be paid off.

What is strange is that most participants in the market believes they are making bugs of this in and out trading. The reality is different. Yes there are some people draining a lot of money out of these derivatives but its on the back of the mass.
The worrisome thing is that the derivatives market is growing very rapidly. We have no what it could cause. If there is not enough money around and a big counterparty fails , who knows what could happen.

Eric Sprott is a Canadian hedge fund manager and founder of Sprott Asset Management. He became a billionaire on paper with the initial public offering of Sprott Inc., the parent of his Sprott Asset Management firm.