Thursday, October 6, 2011

No Longer A "Barbarous Relic," Gold Is A "High Quality Liquid Asset"

The initiative is supported by the World Gold Council, who recently submitted evidence to the Basel Committee for gold to be included in banks' "Tier 1" assets by European banking regulators, recognising gold’s growing relevance as a high quality liquid asset.
The "initiative" refers to the decision by LCH.Clearnet (London Clearing House) - the world's largest clearing agency for fixed income securities - to accept gold as collateral for "clearing" trades.  This is huge. Here's the press release:  LINK

For those who don't know, every trade for every security needs to "cleared" - i.e. securities and cash need to be mechanically/electronically delivered and title to securities transferred.  The clearing house steps in matches the buy-side and the sell-side, making sure that both the funds to pay for the trade and delivery of securities occurs (let's keep it simple and not introduce naked shorting and all the rule violations that go on, especially in the U.S. and Canada).  If one side of the trade fails, the clearing house - in this case LCH - assumes the liability.

In other words, in exchange for guaranteeing both sides a trade, clearing firms require collateral deposits by anyone who wants to be a member of that particular clearing firm (i.e. these days anyone who wants to trade).  And we're not talking about just 100 share lot daytrader trades.  Typical institutional "block" bond trades are in the 10's of millions.  Big money.  Big counterparty risk. If you look at your own account, every security position in there will have the "fingerprints" of a clearing agency on it.  This is big business with big dollars involved and big risk if a big counterparty to the trade fails before it clears.

The acceptance of gold as collateral (remember the term "good as gold?" It's back) is beginning to proliferate.  JP Morgan announced several months ago that it would accept gold as collateral for loans;  the CME - parent of the Comex and one of the largest futures trading exchanges in the world - started accepting gold a year ago.  Another very large, global firm - ICE (Intercontinental Exchange, which trades futures, OTC securities and also functions as a clearing agency) made this move right after the CME did.  And the Russian Central Bank, within the last year, announced that it would accept gold as collateral in its member bank lending transactions.

Everyone see the trend here?  What is slowly creeping back into the mainstream business world is this idea of gold as a currency.  It took about 40 years from the time Keynes declared gold to be irrelevant until the world went fully fiat in 1971.  It's taking even longer for gold to be reinstated as the ultimate currency, but the truly sophisticated global market engineers are now moving in that direction (notwithstanding Donald Trump, who is not sophisticated but who recently announced that he would take gold as collateral in business deals - we all know he has plenty of worthless, bankrupt casino chips that no one will take).  Surely everyone understands by now that Keynes' economic theories are a complete failure...

Myself and a colleague back in 2002 predicted that one of these days we would be able to buy a dream house for less than 10 ounces of gold.  Based on what I'm seeing in the housing market and the developing markets in gold, I am still standing by that view.  The question in my mind is not "if," but "how many ounces less than 10 it will take?"

At some point, I don't know when, there is going to be a global rush into gold - when the majority of businesses and the masses begin to understand why these wealthy, sophisticated financial operators are now using gold in their mix of business - that will make everyone understand why some very bright people are forecasting eventual prices for gold that are unimaginable to most people who refuse to believe or accept what is going on in the global financial system.


  1. Listen to Satyajit Das @13 minutes...

  2. Take the time to listen...

    Ron Paul: We Have Crossed the Rubicon towards Empire and Tyranny!

  3. Dave,

    Great work, I appreciate your efforts. I'm new to your blog, so apologies if you've gone over this before. Clearly you see a bright future in PMs, but it looks like you have a soft spot for gold. How do you feel about the future of silver? Better/worse/the same as gold?

  4. Skimmy dipping????

    Madoff Whistleblower Tells KWN Banks Stealing From Pensions

    In a King World News exclusive interview, the man who brought down Bernie Madoff’s $65 billion Ponzi scheme informed KWN, “Bank of New York is going to go down, Eric. Between Bank of New York Mellon and State Street, these two institutions have stolen between $6 to $10 billion from tens of millions of Americans retirement savings accounts. It’s been a hell of a crime spree for the bank, but now they are being brought to justice.”

    Harry Markopolos, has lead the team that spearheaded this investigation from the beginning. Harry and his team were the first to expose this fraud. Markopolos also told KWN, “The New York Attorney General filed suit on Tuesday (against Bank of New York Mellon) for stealing money from pension funds on currency transactions. This theft has been from tens of millions of Americans, policemen, firemen, librarians, municipal workers, judges and the list goes on and on and they’ve been doing it for decades.

  5. (Dave)

    re: silver vs. gold. Thanks for you comment about my work. I appreciate it.

    Silver over long periods of time has a high "beta" vs. gold. I think we will see the Gold/silver ratio revert back at least 16, maybe even lower, before this is over. So take whatever your target is for gold and divide by 16 and that should be your target for silver.

    I will only publicly admit to a target of $10k for gold, before China ultimately revalues gold substantially higher and fixes its ratio in some convertibility number vs. a new gold/(silver) backed currency....hope that helps.

  6. Dave,
    agree pretty much, but..
    ... China?
    Actually, any country with an inventory could put up a sign advertising a physical gold bid/ask 10x today's "market" in fiat.

    Everyone else would have to follow overnight. Little time for NATO to come knocking.

    Or an oil exporter offering to sell oil "cheap" in terms of gold ounces.

    I reckon it would be more likely a country with less skin in the dollar game and little fear of attack.

  7. "Actually, any country with an inventory could put up a sign advertising a physical gold bid/ask 10x today's "market" in fiat."

    I don't understand this? Why would someone/country offer 10x the market price for gold? To what end?

    I get/like the offering oil/commodity at discount for phys gold. That seems like a likely effective strategy for a sovereign to quickly build reserves.