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Gold is as Good as Cash and Wields More Power

By    |   Friday, 11 Feb 2011 08:37 AM

Gold is now functioning as collateral to compensate for potential losses in the portfolios of financial institutions.

One month ago, I proposed there may be an underlying economic basis for gold to reach $4,000 per ounce in the next decade. This scenario is looking more probable given these recent developments.

Currently, the price of gold has ranged between $1,300 to $1,400.

Natalie Dempster, director of government affairs at the World Gold Council (WGC), recently told The Wall Street Journal, "Gold is increasingly being used as collateral around the world. All these moves reflect a growing recognition of gold's role as a high-quality, liquid asset."

According to the World Gold Council (WGC), daily trading volume for gold is $100 billion. It is more liquid than most European government bond markets. This increased liquidity for gold has increased its demand as a form of collateral.

Moreover, the WGC has been in talks with the Basel Committee on Bank Supervision to include gold as tier-1 capital, along with government bonds and international currencies. These assets represent the safest capital reserves to function as collateral for more risky investments. The Basel Committee is charged with creating international regulations to ensure a more stable financial system around the world.

Exchanges around the globe, including New York, Chicago (Chicago Mercantile Exchange), and Europe have accepted gold as a form of collateral. Recently, JPMorgan was added to this list, and considering the possibility is LCH Clearnet, a consortium of the London Clearing House and the Paris-based Clearnet.

In 2010, LCH Clearnet cleared roughly $180 trillion of fixed-income securities. They also clear transactions involving equities and derivatives on international and Over-The-Counter (OTC) exchanges.

John Burke, the director of fixed income at LCH Clearnet, said “at times of market stress, clearing becomes increasingly important" and that “maintaining liquidity and managing collateral are top of the list of priorities for banks”

“With counterparty and sovereign risk remaining elevated, gold is no longer being seen simply as a commodity. Rather, it is increasingly viewed by market participants as an important asset and a currency with no counterparty risk. We are gradually seeing the monetization and indeed the 'financialization’ of gold, as gold is gradually being reincorporated into the modern financial and monetary system,” according to GoldSeek.

Xia Bin, a Chinese Central Bank adviser, said China must increase its gold and silver reserves. In fact last year, Chinese officials announced they plan to increase gold reserves to 10,000 tons from 1,200 tons during the next decade. They believe accumulation of these reserves, when prices decline, will enhance their strategy to internationalized the yuan (Chinese currency).

According to the Chinese Gold & Silver Exchange Society, Hong Kong will soon be offering yuan-based gold futures possibly by April 2011.

This further strengthens gold as an asset and a stable medium of exchange while increasing the international credibility of the yuan.

It is becoming more probable that gold, currently trading near $1,360 per ounce, could reach $4,000 in the next decade.

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Elias
Gold is now functioning as collateral to compensate for potential losses in the portfolios of financial institutions. One month ago, I proposed there may be an underlying economic basis for gold to reach $4,000 per ounce in the next decade.This scenario is looking more...
barry,elias,gold,cash
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2011-37-11
Friday, 11 Feb 2011 08:37 AM
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