Interesting development this week as the Chicago Mercantile Exchange (CME) is accepting gold as collateral for margins. They already accept a wide range of collateral for deposit into trading accounts including US dollars, certain foreign currencies, US Treasuries, certain foreign debt, asset-backed securities, letters of credit and agency bonds.


The CME released a press release yesterday according to FastMarkets

Gold is the first commodity that can be used
for margins for CME trades, which range from
crude oil to copper or equities, effective
immediately, CME spokesman Jeremy Hughes
told FastMarkets. “It’s a way for holders of gold
to put their bullion to work a bit more efficiently,
rather than it costing them money to keep,” he
said. “It’s also cheaper than funding other
forms of collateral.”

Initially, gold will have to be deposited with
JPMorgan Chase Bank in London but CME
“hopes” to add additional depositories at some
stage, CME Clearing, the exchange’s in-house
clearing house, said in an advisory notice to its
members on October 16.

CME is imposing a strict gold collateral limit of
$200 million and a 15-percent asset haircut on
the market value of all gold deposits. Fees for
storage, insurance and handling of the gold
are estimated at 5 basis points of the value of
the collateral, according to the CME notice.

The announcement follows CME’s discussions
with the London bullion market on cleared
over-the-counter (OTC) London gold forwards,
which traded for the first time late on Friday.
CME launched the clearing service on
September 20 in an effort to curb counterparty
risks that the credit crisis has exacerbated.

CME Clearing already accepts a wide range of
collateral for deposit into trading accounts,
including US dollars, select foreign currencies,
US Treasuries, select foreign sovereign debt,
asset-backed securities, letters of credit and
agency bonds, according to the exchange’s
website

My first thought is that this is a good development for gold as it is assuming it’s  role of “real money” again. However, I can’t help thinking that a normal correction in the underlying commodities could have the CME margin clerks ruthlessly selling the gold in order to meet margin calls–which is their right.

Time and further reflection are required.