LCH.Clearnet, a leading independent clearing house, is considering a plan to accept gold bullion as collateral against margined positions. London is the world’s largest market for over-the-counter gold trading. This follows an announcement by J.P. Morgan that it will become “ … the only tri-party collateral manager to accept physical gold as collateral to satisfy securities lending and repo obligations with counter-parties. And according to spokesman Chris Grams, the CME accepts allocated gold at the JP Morgan vault in London as collateral against any asset class position an investor might have at the CME.
Why is this move important? Market watchers say it adds credibility to the argument that gold is an alternative asset, a type of alternative currency. Banks are always looking at their scarce resources including, cash and gold. Leveraging an increasingly valuable gold inventory would be a natural next step, and likely welcome extension of that process.
There will be a substantive benefit for all firms active with gold bullion and/or LME registered warrants. It is the direction of the overall market to use warehouse receipts and/or bullion for margin purposes. And, as the London Metals Exchange (LME) gets closer to launching its over-the counter (OTC) contracts for gold traded in London, it will be important for the gold community to lever it’s existing stores for margin purposes. And perhaps in the process, ease the transition to a more transparent, over-the-counter gold market.
European sovereign debt yields are flat. UK gilts have seen some selling again today with the yield rising to 3.86%. In just 5 weeks the yield on the UK 10 year has risen nearly 50 basis points from 3.393% to 3.86%. Most commodities are higher today and NYMEX crude oil is up 0.2% to $89.21 and Brent up 0.7% to $100.56 a barrel.
JP Morgan announced today that from now on they will accept physical gold bullion as collateral. This is a sign of gold’s further remonetisation in the global financial and monetary system. It may signal that JP Morgan is having difficulty in securing gold bullion in volume. JP Morgan is the custodian for many of the gold and silver exchange traded funds. They will not accept ETF trust gold as collateral. In October, the clearing house of global exchange CME Group – CME Clearing – announced it will now accept gold as collateral for trades on the exchange. Gold bullion can be used for margins for CME trades, ranging from crude oil, gold, grains, equity indexes and Treasury bonds. Given the current monetary, macroeconomic and geopolitical risk gold is an attractive alternative to debt, equities or other paper assets as collateral. JP Morgans’s move shows how gold bullion’s fungibility and tangibility as an asset makes it attractive and shows gold’s increasing importance in the financial system.
Interestingly, the CME is storing their collateral gold at JP Morgan Chase Bank in London. The exchange said it hoped to add additional depositories in the future but there has been no announcement of developments in this regard. Silver prices remain in backwardation, showing that buyers are willing to pay a premium for silver delivered sooner rather than later. Both gold and particularly silver are vulnerable to a short squeeze that propels prices beyond their recent record nominal highs. In the gold market that are some 80,000 short contracts which is more than 30% than the average short position in 2010. The concentrated shorts who the CFTC has been investigating will be nervous and given the strong fundamentals in the bullion market may be forced to buy back their positions in order to protect themselves from significant losses.
Source: WSJ
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