Two Ways to Interpret Gold’s Acceptance as Collateral to the Global Financial Community

Prices influence people’s behaviour.

The persistent trend of rising gold prices seems to have been changing the psychology of the public to the point of compelling mainstream financial institutions to accept gold as an asset.

Writes the Mineweb, (bold emphasis mine)

Gold is indeed a form of money as many believe and the latest agreement by the European Parliament's Committee on Economic and Monetary Affairs to allow central counterparties to accept gold as collateral is further recognition of the yellow metal's growing relevance as a high quality liquid asset.

In a press release today, the World Gold Council's Natalie Dempster, is quoted as saying "It is very significant that the European Parliament is putting its weight behind the argument that the unique characteristics of gold make it an ideal form of high quality liquid collateral.

"We now look forward to the European Parliament and Council of the European Union upholding the inclusion of gold in the next stage of negotiations around EMIR which will now take place after the July plenary vote. The ratification would mark a significant step forward in redefining what constitutes a highly liquid asset under the Capital Requirements IV Directive, due in the coming month, from the European Commission."

The acceptance of gold by the previously reluctant financial community has been growing apace. As the WGC 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.

Exchanges across the world, such as Chicago Mercantile Exchange, are now accepting gold as collateral for certain trades and London-based clearing house LCH Clearnet has said that it also plans to start accepting gold as collateral later this year, subject to regulatory approval.

There are two sides to interpret this development.

First is the good news. Gold as collateral could be construed as transition to integrate gold as part of the future reforms to the current fiat (legal tender based) paper money system. Hence the “remonetisation” label.

The second may be bad news. When we see regulators massively expand their role in the marketplace, coursed through various interventions, we know that this isn’t gold-standard friendly.

Yes gold may be included as collateral, but only as an asset that may help abet the credit expansion process.

The highly protected cartelized banking system would serve as natural political opposition to a gold standard because a gold standard would put tethers to bank credit inflation.

So it’s best to view this collateral issue with a tinge of suspicion. Like the Trojan Horse strategy employed by the Greeks in the Trojan War mythology, this could even be used as a way to confiscate people’s savings through ownership of gold.

Nevertheless one thing is clear, rising prices of gold has been changing the role it plays in the international financial community.