Tuesday, 8 May 2012

Gold as Good Collateral / Dark Inventory in Commodities

FT Alphaville has continued a series of interesting articles by Izabella Kaminsky.

For some time now the team have considered systemic financial perspectives on the falling availability of "Good Collateral" as bonds - debt paper - fail to hold value, for example in Spain, Italy etc.

Here considering a "De Facto Return to the Gold Standard" as presented by Professor Lew Spellman. The most significant part of this story I consider to be the decision making to come from the Bank of International Settlements (BIS) through the Basel Committee for Banking Supervision to determine whether Gold can be held as a Tier 1 banking asset.
Such assets can be held as core capital with little or no margin. This would put gold very clearly back into of the monetary system. Volatility, especially downwards, would then impact core banking capital. The BIS is little discussed but appears remarkably powerful.

A more recent article considers the reducing volatility of commodity prices, the apparent tight availability of oil and copper against a background of high inventories.
The suggestion is that commodities are being used as collateral in financing deals. The official inventories are therefore "encumbered" and not available for sale creating a squeeze on prices. The suggestions also followed up in the comments section are that this concentrates one way risk away from public markets. I would relate this to the first article in that markets, especially the Chinese market are holding large inventories and using them as "money".
I would add that useful day to day commodities are not supposed to be used as money.
These effects are having real economic impacts.
Much better to use monetary metals for such collateral ?

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