Crossing the Golden Rubicon

February 10, 2011
By

There was a very interesting piece of news this week that has not seen much discussion.

J.P. Morgan, the second largest U.S. bank by assets — and arguably the most powerful by other key measures — has announced it will accept gold as transaction collateral.

Via the Wall Street Journal:

Gold hasn’t reinvented itself as a currency yet. But it is getting closer.

J.P. Morgan Chase & Co. said it will allow clients to use the metal as collateral in some transactions. For example, a hedge fund wanting to borrow money for a short period can put up gold as collateral and use the borrowings to invest elsewhere, betting on making a better return. Typically, banks accept only Treasury bonds and stocks in such agreements.

By making the announcement, J.P. Morgan is effectively saying gold is as rock solid an investment as triple-A rated Treasurys, adding to a movement that places gold at the top tier of asset classes. It also is trying to capitalize on all the gold now owned by hedge funds and private investors that is sitting idle in warehouses.

Those who look favorably on the yellow metal have always viewed gold as money. Their case for doing so stretches back thousands of years, to the Lydian gold coins of sixth century B.C.

But this event is a milestone in that, for the first time, the global financial elite are conferring a stamp of legitimacy on gold. No longer just a “barbarous relic,” one can now post the stuff up for margin.

Why did JPM do this? As the WSJ piece suggests, there is most likely a simple business opportunity at hand. Given all the gold on clients’ books, why not make use of it to fuel a little more leverage?

The logistical implications of gold as collateral (for other financial transactions) could also be an investment game changer.

For the longest time, gold has been considered an inert asset: No yield, no cash flows, no intrinsic rate of return. This in fact may be the detractors’ best case, particularly among those who say “gold is not an investment.”

So, in the eyes of a certain crowd, buying gold is seen as a foolish move… tying up one’s capital without some calculable rate of return (other than hoped-for price appreciation).

But now, gold buyers can have their cake and eat it too: They can purchase gold as a form of insurance and inflation hedge… and then, rather than having their capital tied up in such purchases, they can use those holdings as collateral to make other bets.

Welcome to the new carry trade. And welcome to a new dynamic for both 1) the potential popularity of gold in the event of a serious inflation outbreak, and 2) a whole new source of liquidity in respect to facilitating monetary velocity if and when inflation heats up.

One could ask further questions of the House of Morgan: Do they hope to accumulate even more gold in their vaults? Is this a means of offsetting other transactions in darker corners of the bank? Is this a sign the financial oligarchy is preparing in advance for a wave of devastating inflation, knowing it to be the inevitable end result of the self-dealings they have wrought?

And with the JPM announcement coming a mere six months prior to the 40 year anniversary of Nixon shutting the gold window, has the yellow metal’s status undergone a new and permanent phase transition?

Has the longstanding fiat money system — a mere four-decade blip in history’s grand sweep — crossed some sort of Rubicon?

Things that make you go hmmm….


Like this article? Share!

Leave a Reply

Your email address will not be published.


Current ye@r *