Tuesday, February 08, 2011

Gold Collateral and "42 Wild Italians"

Remember, folks, bad information can spread around the internet just as quickly as good information can.  Did anyone see the Super Bowl ad last night for the Chevy Cruze?

The hard-of-hearing misunderstand "42 miles per gallon" As "42 wild Italians."  They quickly get off track, and start babbling about random stuff, blissfully ignorant of the facts of the situation.  I couldn't help but think of this as I read GoldCore's piece yesterday about JP Morgan's new collateral process. GoldCore writes:

"JP Morgan announced today that from now on they will accept physical gold bullion as collateral. This is a sign of gold’s further remonetisation in the global financial and monetary system. It may signal that JP Morgan is having difficulty in securing gold bullion in volume. JP Morgan is the custodian for many of the gold and silver exchange traded funds. They will not accept ETF trust gold as collateral. "

Now, there is fact, speculation, and error in this short paragraph.  The fact is that JP Morgan announced that they will accept physical gold bullion as collateral. - that is exactly what JP Morgan announced, and interested parties should read the press release here.  The speculation is that this could have impacts on how the world views gold as money, etc etc, and that JP Morgan is desperate to get their hands on bullion.  The error is the statement "They will not accept ETF trust gold as collateral,"  hyped up of course, with the preceding sentence reminding readers that JP Morgan is the custodian for many metals ETFs.  The readers on the other end of the internet telephone then start screaming "OMG!  JPM won't accept gold ETFs as collateral because they know that there's no actual gold in them!" Unfortunately for the hypesters, that is not correct.

In fact, if you read the JP Morgan press release:

"Gold can now be used as collateral to satisfy securities lending, repo, pledge and other
obligations with counterparties. As the only tri-party agent able to offer this innovative,
integrated solution, J.P. Morgan combines its market-leading commodities, vault and collateral management capabilities to extend the range of collateral types available to tri-party clients."
followed by a list of the benefits of using gold as collateral, and then the concluding paragraph:

"Additional precious metals and commodities will become available for use as collateral. The ability to support any collateral type, settlement platform or region is a key component of J.P. Morgan’s Global Collateral Engine initiative. Designed to be asset and obligation neutral, Global Collateral Engine offers clients greater flexibility in how they mobilise collateral to extract maximum value."

You'll notice that JP Morgan certainly did not say anything about refusal to accept ETFs or "ETF trust gold" as collateral.  This is a press release about a new collateral type.  Thus, JP Morgan did not go into detail about each type of collateral which they already accept, and GoldCore misread this as "they didn't say that they accept gold ETFs, so therefore they don't!"  However, the press release clearly notes other types of collateral accepted in the right sidebar:

Broad range of collateral types
-Corporate Bonds
-Government Bonds
-Convertible Bonds
-Asset Backed Securities
-Exchange Traded Funds

ETFs are already accepted as collateral, that's why this press release didn't say "We are now accepting GLD as collateral" - because it's already accepted.  Similarly, the press release also didn't say "We are accepting 10 year Treasuries as collateral" - they are already accepted.   Now, stepping back a moment, what GoldCore actually wrote in their post is "They will not accept ETF trust gold as collateral."  Although it looks like readers interpreted that as "They will not accept Gold ETFs as collateral," (which we already know is false), perhaps GoldCore was trying to say something else, like "JP Morgan will not allow the GLD ETF Trust to pledge its gold bullion as collateral."  That would be a good thing, of course, although irrelevant, since the GLD Trust doesn't pledge its gold as collateral anyway - they have no reason to - their mandate is to own only gold bullion.  GLD holders certainly wouldn't want the GLD Trust to pledge their gold bullion as collateral to speculate in other instruments or asset classes, but the GLD prospectus prohibits that anyway, so it's a moot point.

note: I confirmed with a contact at JP Morgan that GLD can absolutely be used as collateral in tri-party repo settlements.

If you're trading gold based on the incorrect "news" that JP Morgan is refusing to accept the GLD ETF as collateral, then you're trading on bad information.


disclosures: no position in GLD, long SLV


Anonymous said...

There's even less to this than meets the eye. Plenty of hedge funds dabbling in precious metals are already using their holdings as collateral to build levered positions. But that is in bilateral arrangements with their prime brokers. What's "new" is that JP Morgan-the-clearing-bank is now set up to handle physical gold in tri-party arrangements. So they are offering a new customer service - the sky must be falling.

Of course they already accepted ETFs! They settle exactly like any other equity.

Onlooker said...

Party pooper! ;-)

You sure know how to ruin a perfectly good piece of precious-metals-paranoia fuel.

The folks at GATA and their wild eyed followers work very hard at fostering this environment. Please don't inject such things as, well, FACTS! LOL

Chris said...

Kid - there are no dumb questions, only dumb people:

Is your SLV position in any way based on (or at least buoyed by) Michael Lewis' comment (at the 4:15 mark) a few nights ago on Colbert regarding (I'm assuming) Michael Burry's effort to buy nickels to harvest the silver content?

Kid Dynamite said...

Chris - ha - no - that has nothing to do with it. I don't think nickels have any silver in them anymore, but they are probably worth a little more than 6c anyway. Sweet arb!

We were joking about cornering the copper market 5 years ago by buying pennies. then someone said "YOU IDIOTS - PENNIES ARE MADE OF NICKEL!" "What are nickels made of?" "COPPER!" fahhhhhk! our ploy will cost 5 times as much!