Friday, May 27, 2011

Four Reasons Why Gold Makes For Good Collateral

On the heels of the European Parliament’s Committee on Economic and Monetary Affairs' unanimous decision to allow central counterparties to use gold as collateral, Commodity Online has published an article giving four reasons why they made the right decision. Those reasons are:
  1. Unlike sovereign paper, gold has no credit risk attached to it. As Doug Casey is fond of saying, it's the only (money-related) asset that is not someone else's liability.
  2. Pricing is transparent. Most transactions are done in over-the-counter markets, and trading is done almost twenty-four hours in every weekday. From Monday to Friday, various market makers are expected to put up bids and asks throughout the day.
  3. There's a deep and liquid market in gold. The total gold stock has been estimated by metal consulting firm GFMS to be 166,600 tonnes: at current prices, that's a value of about $8.2 trillion. About 38% of that gold is in private hands and the official sector.
  4. Other uses for gold, particularly jewelry, gives a diverse and robust character to the demand for it.
As the end of the piece points out:
Market demand for gold to be used as a high quality liquid asset and as collateral has been building for some time. In late 2010, ICE Clear Europe, a leading European derivatives clearing house, became the first clearing house in Europe to accept gold as collateral.

In February 2011, JP Morgan became the first bank to accept gold bullion as collateral via its tri-party collateral management arm....
So, it's no wonder that the committee approved.

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