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Thursday, May 26, 2011

Bid to use gold as collateral advances in Europe

aus bus pix gold
INVESTORS are closer to being able to use gold as a trading security after a European parliamentary committee approved a proposal to allow clearing houses to accept gold as collateral.

The European Parliament's Committee on Economic and Monetary Affairs agreed unanimously to allow clearing houses to accept gold.

The proposal, under the under the European Market Infrastructure Regulation, will be passed to the European Parliament and the Council of the European Union for another round of voting in July.

The credit quality of traditional collateral assets such as European government bonds have continued to see a deterioration.

Gold's strong price gains in recent years have seen its appeal as collateral increase.

Clearing houses and other institutions have looked at introducing new sources of collateral since the financial downturn in 2008 highlighted inadequacies in counterparty risk management in the global over-the-counter market.

The G20 said it wanted to try to reduce financial market risks by putting more products into clearing houses, increasing the demand for collateral as security against risks.

At the same time, many traditional collateral assets, such as European government bonds, have continued to see a deterioration in credit quality as a result of the sovereign-debt crisis.

In October 2009, CME Group said it would allow physical gold to be used as collateral for margin requirements, a move that was followed by rival IntercontinentalExchange in late 2010.

In February this year, JP Morgan Chase announced its decision to accept physical gold as collateral in some financial transactions.

"It is very significant that the European Parliament is putting its weight behind the argument that the unique characteristics of gold make it an ideal form of high quality liquid collateral," said Natalie Dempster, director of government affairs at the World Gold Council.
Wall street Journal

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UN sees risk of crisis of confidence in U.S. dollar

Chris Ratcliffe/Bloomberg

UNITED NATIONS – The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.
In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system.
The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s.
This trend, it said, had recently been driven in part by interest rate differentials between the United States and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners.
“As a result, further (expected) losses of the book value of the vast foreign reserve holdings could trigger a crisis of confidence in the reserve currency, which would put the entire global financial system at risk,” it said.
The 17-page report referred at another point to the “still looming risk of a collapse of the United States dollar.”
Rob Vos, a senior UN economist involved with the report, said if emerging markets “massively start selling off dollars, then you can have this risk of a slide in the dollar.
“We’re not saying the collapse is imminent, but the factors are further building up that we could quickly come to that stage if other things are not improving quickly on other fronts — like the risk of the U.S. not being able to service its obligations,” he told Reuters.
UN economists have for some time queried whether the dollar should continue to be the world’s sole reserve currency. Others have also expressed concerns about U.S. finances.
Standard & Poor’s threatened on April 18 to downgrade the United States’ prized AAA credit rating unless the Obama administration and Congress found a way to slash the yawning federal budget deficit within two years.
A downgrade would erode the status of the United States as the world’s most powerful economy and the dollar’s role as the dominant global currency.
Financial Post


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