J.P. Morgan Chase & Co. announced on February 7, 2011 that it will accept physical gold as collateral for investors that want to make short-term borrowings of cash or securities.
Presenting gold to satisfy demands for performance bond collateral has been allowed on the London CME in a limited way since October 2009. As of November 22, 2010, the Intercontinental Exchange Inc. (ICE) has accepted gold bullion as collateral on all credit default swaps and energy transactions.
I don't recall the G-20 declaring gold a new currency. Yet JPMorgan Chase and a couple of financial market exchanges have effectively declared that gold is an alternative currency.
In other words, gold is money.
Abolish Credit Default Swaps on Sovereign Debt
In an earlier post, I wrote that Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Credit defaults swaps on the United States currently settle in euros, but there is talk of creating new contracts calling for settlement in gold. Congress should immediately ban all credit derivatives on the United States, since the opportunities for mischief making outweigh the hedging value.
Most traders in U.S. credit default swaps don't think the U.S. will default as long as we have money printing presses, so they are speculating on price movements in U.S. Treasury bonds due to potential increases in interest rates. If speculators manage to get contracts to settle in gold, speculators on the winning side of a price move will demand collateral paid in gold.
Destruction of the Volcker Bubble Deflator
In 1979/1980 the Hunt brothers tried to corner the silver market. In March 1980, Paul Volcker (who was then Chairman of the Federal Reserve) went to DEFCON 1 and directed banks to cut off funding to precious metals speculators. That directive included billionaires like the Hunt brothers. The Hunts couldn't borrow money against their long silver positions to meet their margin calls. Volcker popped the silver bubble and the Hunt brothers were bankrupted.
Since gold is now accepted collateral, there will always be a way to borrow against one's gold position, so speculators that create leveraged long gold positions can always find a way to fund margin calls. The Volcker bubble deflator is no longer relevant.
Trifecta of Absent Financial Regulation: CDS, Currencies, Commodities
How much mayhem could "creative" minds generate in the credit default swap markets, the currency markets, and the gold market? Quite a bit, since customized credit default swaps can be embedded in all manner of financial investments, and they can be written to offload unexpected risks on naïve investors.
The Dodd-Frank "financial reform" bill doesn't address customized over-the-counter credit default swaps, and the bill doesn't do anything at all to reign in speculation in the currency markets or the commodities markets.
See also:
"How to Corner the Gold Market", TSF, March 30, 2010
"Washington Must Bank U.S. Credit Derivatives as Traders Demand Gold, Part 1," HuffPo, March 8, 2010
"Washington Must Bank U.S. Credit Derivatives as Traders Demand Gold, Part 2," HuffPo, March 12, 2010
Disclosure: I currently own some long positions in precious metals including gold. This is not an offer or solicitation for purchase or sale of any security and is not an investment recommendation of any kind and should not be construed as such. These comments reflect my views as of February 7, 2011, and are subject to change at any time based on market and other conditions.
Endnote (February 9, 2011): See also: "Repairing the Damage of 'Fraud as a Business Model,'" TSF Address to the FHFA's Supervision Summit in Washington D.C., December 8, 2010.
Marshall Fine: Movie Review: Margin Call
People used to think that land, real estate, homes were a store of wealth and a hedge against inflation. Then as the value went higher and higher they borrowed more and more against the "collateral" and bankers turned the collateral into more and more paper and traded it around - pension funds ect. got invested and the rest is history.
Many people around the world have accumulated physical gold for the same reason and now they are offered a way to cash out and borrow against their collateral. Physical gold turned into paper and pension funds ect. getting invested - if it goes down in value ("it will never go down") - more wealth destroyed - what is next oil? food? But gold, oil, food can never go down right just like land - homes?
Looking back people would have been better off selling homes at the peak and not holding on to them and certainly not borrowing against them. People would have been better off not buying homes and people who held on who didn't borrow were wiped out too.
Where does this end? Who wins in the end? Maybe I am asking what is the difference between pieces of gold and pieces of paper. Pieces of equity and pieces of debtors. Value in the thing or value in the borrower's ability or willingness to pay. Who owns who
For the handful of billionaires in Wall Street, we are like chickens. For them, we are here on earth so that they can collect our (retirement) eggs, and they do not seem to mind eating some of us or putting us outside in the cold.
Those supper rich billionaires cannot be bothered with how unfair it is for one person running a bunch of paper shuffling scams (legal or not) to end up with a billion that was created by years of hard work done by millions of people.
Those billionaires seem to feel comfortable with the Darwinian notion of “survival of the strongest”. I am pretty sure they would change their view when “the strong” is a crowed of angry people, and their body guards take off with the Ferrari and the expansive artwork.
I think Madoff is evil. I think most of the others are not really evil. I am sure they are very nice to their pets. I think they simply lack a much of depth and understanding that results from normal and real interaction with "ordinary people". For them, people are replaceable commodity put there to serve their needs. We are their chickens.
Our's?
You mean the stuff in Fort Knox that know on one has verified or audited in 50 years?
Or does the FED claim it now? Since we abdocated coining money to them.
Fiat Currency is paper thats the stuff the Treasury Prints for the FED
Money is Gold and Silver has been since recorded history.
Apparently, this generation and Janet are about to learn this distinction the hard way.
-AJB
Just because they can hide their losses, by dumping their worthless toxic MBS (derivatives) onto Fannie/Freddie, use accounting tricks etc. to hide what the Federal Reserve's own website says: 100 trilllion in derivatives, does not mean at some point they will have to face RECEIVERSHIP/BANKRUPTCY RE-ORGANIZATION.
It's like holding corporate bonds from all US companies. Sure lots are going to go under, but probably not enough to even lose money in any year. That was the bet with housing, but prices fell nationally for the first time in 70 years, and are near bottom. We won't another crash like this. It's like the stock market after 1929, people who remembered it never invested again, like my parents. We Boomers were the first to forget, so the stock market got pumped again and crashed in 2000. There won't be another housing boom, we know better now. No boom, not bust.
If these people at the fed don't understand the nature of derivatives which they obviously don't & can't even keep up with, they shouldn't be on the market...They are "Gambling" with the countries future again & the Feds are asleep at the wheel!!! Another WTF moment in American History!!!
These people keep on creating more & more dangerous games with these dam derivatives and no one seems to be there to stop them or put on the breaks. WTH works for who. Forget about the Regulators...just Fire them...They probably still don't know who won the Superbowl!!!
The Hunt brothers was an amazing story, how some of the richest men in the world got caught in their own web trying to corner the market on Silver & then got it pulled from under them. Now we need another Volker to do the same on the derivative market!!! Who's the next "SuperHero"?
http://www.alexastock.webs.com
The story though is JP accepting physical gold as collateral. Aren't they also the custodians of the GLD fund? Talk about opportunities fo mischief, yes?