Will Gold Become Collateral for a Euro Zone Bailout?
“Gold is Money. Everything else is credit.” -J.P. Morgan
Although Ben Bernanke says gold is not money, countries around the world sure are treating it as such. Last week, Hugo Chavez announced he was nationalizing Venezuela’s entire gold industry. Furthermore, the central bank of Venezuela has sent a statement via email requesting its 99 tons of gold holdings from the Bank of England. Gold is not only seen as currency by many, but also as a valuable hedge. Now, in exchange for bailout assistance, Germany is looking to hedge bailout repayment risk with gold.
Gold being used as collateral is a trend picking up momentum. The Chicago Mercantile Exchange started this trend in 2009 when it became the first exchange to allow gold bullion to be used for margin requirements. Since then, JP Morgan became the first bank to accept gold as collateral. Now, hedge funds looking to borrow money to invest elsewhere can supply gold as their collateral. Last year, ICE Clear Europe also became the first clearing house in Europe to allow gold as a form of collateral.
German Labor Minister, Ursula von der Leyen, exclaimed that future bailouts for eurozone countries should be covered by either gold reserves or stakes in state industry. This announcement comes a week after Finland agreed to participate in a second Greece bailout in exchange for cash collateral. Unlike Finland though, Ursula von der Leyen is suggesting gold as collateral, not cash. According to the latest World Gold Council holdings report, Germany holds the second largest stockpile of gold at 3,401 tonnes, which represents 71.4% of reserves. Perhaps the German people understand the currency wars taking place around the globe? After all, the Weimar Republic hyperinflation years are not exactly ancient history.
Today, currencies around the world are being debased as governments and central banks continue to print money in hopes of sparking a recovery. Gold offers protection from debasement of currencies and lack of confidence in financial markets. If the trend of requiring gold collateral in exchange for bailouts catches on, it would be another bullish sign for gold. Bank of America might want to stock up on potential collateral as gold prices remain off their nominal highs.