The Customer is Always Right: CME Raises Gold Collateral Limit

Despite volatile trading and pullbacks, gold (NYSE:GLD) continues to be seen as a real hard asset.  Last year, ICE Clear Europe became the first clearing house to accept gold (NYSE:PHYS) as collateral.  Earlier this year, JP Morgan (NYSE:JPM) became the first bank to accept gold bullion as collateral.  Even Donald Trump is accepting gold as collateral, as the real estate mogul announced last month that he was accepting gold bullion as a security deposit for the first time.  Now, the CME Group (NASDAQ:CME) will allow customers to use more gold as collateral.

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Effective from the close of business on Monday, CME customers will be able to post more gold as performance bond collateral with CME Clearing.  Performance bonds and margin requirements act as collateral for futures trading.  Customers can now use up to $500 million of physical gold for collateral.  This is more than double the previous limit of $200 million.

In an email to Kitco, Harriet Hunnable, CME managing director for metals products explained, “Bullion customers asked us to increase the amount up from $200 million.  A number of our clearing firms hold gold in London and some want to utilize more of it for collateral. Gold has an interest rate just like USD (NYSE:UUP) and euros for example.  The interest rate for gold is currently negative, so this means that it is very cost efficient for a holder of gold to place it as collateral.”

The CME first started to allow physical gold to be used as collateral in October 2009, with competitor IntercontinentalExchange (NYSE:ICE) following their lead in November 2010.  The recent CME move to increase the use of gold as collateral is seen as a bullish signal by many.  Bill O’Neill, from LOGIC Advisors explains, “It gives gold additional credibility as the alternative currency.  It might also lessen liquidation of gold, as it is now used as a margin vehicle so participants are not actually liquidating.”

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