JP Morgan Accepts Gold Bullion as Collateral - Silver Backwardation to Lead to Short Squeeze?

Published in Market Updates  Precious Metals Update  on 7 February 2011

By Michael O’Brien


 Gold is marginally lower in euro, pound and dollar terms and marginally higher in Japanese yen and Swiss francs. Silver is higher in all currencies. With gold’s 0.51% higher close last week (first rise in 5 weeks) and silver’s 4% rally, the bears will be nervous that the recent downward trend may have reversed. 

Cross Currency Table GoldCore
Cross Currency Table 

Asian equities were higher except for the Hang Seng which fell 1.49% as developers fell on concerns regarding Chinese property prices. European indices have shrugged off the tensions in Egypt, North Africa and the Middle East and the Euro Stoxx 50 is up by 1.1%. 

UK Gilts 10 Year (30 Days (Tick) GoldCore
UK Gilts 10 Year (30 Days (Tick) 

European sovereign debt yields are flat. UK gilts have seen some selling again today with the yield rising to 3.86%. In just 5 weeks the yield on the UK 10 year has risen nearly 50 basis points from 3.393% to 3.86%. 

Most commodities are higher today and NYMEX crude oil is up 0.2% to $89.21 and Brent up 0.7% to $100.56 a barrel. 

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. 

In October, the clearing house of global exchange CME Group – CME Clearing – announced it will now accept gold as collateral for trades on the exchange. Gold bullion can be used for margins for CME trades, ranging from crude oil, gold, grains, equity indexes and Treasury bonds. 

Given the current monetary, macroeconomic and geopolitical risk gold is an attractive alternative to debt, equities or other paper assets as collateral. 

JP Morgans’s move shows how gold bullion’s fungiblity and tangibility as an asset makes it attractive and shows gold’s increasing importance in the financial system. 

Interestingly, the CME is storing their collateral gold at JP Morgan Chase Bank in London. The exchange said it hoped to add additional depositories in the future but there has been no announcement of developments in this regard. 

Silver prices remain in backwardation, showing that buyers are willing to pay a premium for silver delivered sooner rather than later. 

Both gold and particularly silver are vulnerable to a short squeeze that propels prices beyond their recent record nominal highs. In the gold market that are some 80,000 short contracts which is more than 30% than the average short position in 2010. 

The concentrated shorts who the CFTC has been investigating will be nervous and given the strong fundamentals in the bullion market may be forced to buy back their positions in order to protect themselves from significant losses.

Gold

Gold is trading at $1,346.80/oz, €994.02/oz and £836.37/oz.

Silver

Silver is trading at $29.22/oz, €21.56/oz and £18.14/oz.

Platinum Group Metals

Platinum is trading at $1,346.80/oz, palladium at $815.50/oz and rhodium at $2,450/oz.

News

(Bloomberg) -- JPMorgan Will Accept Gold as Collateral for Securities Lending 
JPMorgan Chase & Co. said it will accept physical gold as collateral “to satisfy securities lending and repo obligations with counterparties.” 

The company expects to accept additional precious metals and commodities as collateral later this year, it said today in an e-mailed statement. 

(Bloomberg) -- Investors Have $102 Billion Bet on Gold, Silver Gains 
After the worst January for precious metals in two decades, investors still have a $102 billion bet on higher prices, hoarding more gold than all but four central banks and more silver than the U.S. can mine in almost 12 years. 

The five analysts ranked by Bloomberg as the most accurate over two years expect silver to rise as much as 23 percent before the end of 2011 and gold 20 percent, the median of their estimates show. UBS AG predicts the strongest industrial demand for silver since at least 1990 and the second-highest sales of exchange-traded gold products on record. 

The decade-long surge in gold attracted fund managers from John Paulson to George Soros and is now spurring central banks to add to their reserves for the first time in a generation. Once written off as demand for photographic film waned, silver found new uses in everything from solar panels to plasma screens, making it the precious metal most used in industry. As stocks rose 9 percent and Treasuries returned 67 percent since the end of 2000, gold surged fivefold and silver sixfold. 

“I had to chuckle when I saw reports that it was over for gold,” said Michael Cuggino, who helps manage $10 billion at Permanent Portfolio Funds in San Francisco, and has about 20 percent of his assets in gold. “Some investors have taken money off the table after a significant run-up in 2010. If you look at the macro environment, the instability around the world, the worldwide currency devaluation, these factors all bode well.” 

(Bloomberg) -- Venezuela’s Gold Reserves Rise 12%, Reserves Abroad Fall 37% 
Venezuela’s central bank increased its gold reserves 12 percent in the second half of 2010 while its reserves in foreign banks fell 37 percent in the period, according to the bank’s year-end financial report published in today’s Ultimas Noticias. 

The bank’s gold reserves increased to 42.4 billion bolivars ($9.86 billion) at the end of 2010 from 37.3 billion bolivars at the end of June, the bank report said. The central bank’s reserves held in foreign banks fell to 7.32 billion bolivars by year-end from 10 billion bolivars in June. 

(Bloomberg) -- Sugar Shortage Looms as Storm Ruins Australian Crop 
World sugar output will probably fall short of demand, said Rabobank, after a cyclone with winds stronger than Hurricane Katrina destroyed homes and smashed crops in Australia, driving prices to 30-year highs. 

(Bloomberg) -- Corn Advances to 30-Month High as World Inventories Set to Drop 
Corn climbed to the highest level since July 2008 on speculation that a U.S. government report on Feb. 9 will show global stockpiles declined before the 2011 harvests because of increasing demand. 

(Bloomberg) -- South Korea’s Lee Calls for Food Crisis Task Force, Yonhap Says 
South Korean President Lee Myung Bak said that the government needs to create a joint task force with civilian experts to tackle food security amid soaring global prices, Yonhap News reported. 

(Bloomberg) -- Bernanke Bet Commodities Won’t Boost Inflation Wins Investors 
Investors are betting with Ben S. Bernanke that surging food and energy prices won’t accelerate U.S. inflation, allowing him to maintain easy money. 

(Bloomberg) -- Egypt Crisis to ‘Impact’ India Central Bank Actions 
Egypt’s political crisis poses a risk to oil prices and will “impact” the Indian central bank’s actions, Deputy Governor Subir Gokarn said. 

(Bloomberg) -- ‘Unhealthy’ Budget Safer Than Top-Rated France: Japan Credit 
Japan is a safer investment than France even after Standard & Poor’s cut the Asian nation’s credit rating to three steps lower than its top-ranked European counterpart, credit-default swap prices show. 

(Bloomberg) -- Euro Gains Before German Factory, Industrial-Production Reports 
The euro rose against the dollar, snapping a three-day decline, before German reports this week that economists said will show factory orders climbed from a year earlier and industrial production expanded.


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