In a surprise announcement yesterday with significant ramifications in the gold markets, J.P. Morgan (NYSE:JPM) said it would allow clients to use metals as collateral in some transactions. Small Cap gold companies like Capital Gold (AMEX:CGC), Banro (AMEX:BAA), Brigus (AMEX:BRD), and Entree (AMEX:EGI) the consequences are tangible.
When President Nixon took the U.S. off the “Gold Standard” everyone thought the world would collapse, but it didn’t.
U.S. currency was backed up by gold. If the currency went sour due to deflation or a dozen other scenarios, currency could, theoretically, be turned in for its gold value.
When the recent “Great Recession” got a full head of steam and gold and bonds were the safe haven in the flight from equities, gold soared and took on a new luster.
As reported, ‘by making the announcement, JPM is effectively saying gold is as rock solid an investment as triple-A rated Treasurys.’
The gold market is more liquid than many government bond markets in Europe, with daily trading volumes normally exceeding $100 billion, according to the World Gold Council.
Some have wondered if JPM is trying to establish gold as a new ‘Asset Class’ and ther3eby give it more credibility in the capital markets as a parallel to currency.
Other gold observers have pointed out that perhaps JPM realizes how much physical gold is now sitting idle in vaults around the world, now that the recession is over, and what better way than to allow them to back up a loan or a stock purchase on margin than putting that gold up as collateral and holding it in JPM’s vaults.
So if a private equity firm wants a 30 day cash loan, instead of using a treasuries, which is typical, it can now use gold.
"Many clients are holding gold on their balance sheets as an inflation hedge and are looking to make these assets work for them as collateral," said John Rivett, collateral-management executive at J.P. Morgan Worldwide Securities Services.