SGE to accept gold as collateral

We often talk about the fact that gold has been used as money for thousands of years. Since the financial crisis of 2008, there have been efforts made to increase the quality of collateral for derivatives and gold’s lack of counter party risk makes it well suited to this scenario. In fact, the 2nd of this month marked 2 years since the release of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions report on margin requirements for non-centrally cleared derivatives. Part of the report focused on what was considered acceptable for collateral; and gold was included in the list.

Now, the Shanghai Gold Exchange has announced that it plans to start accepting precious metals as trading collateral beginning on the 29th of this month. Under the arrangement, trading entities opening contract positions will be permitted to utilise certified gold bars as margin collateral for up to 80% of the margin value. Unsurprisingly, physical metal will be required and the definition of the collateral extension will also include silver. Additionally, the exchange will not be applying fees for gold collateral until early next year.

The chief analyst at Shandong Gold Financial Holdings Capital Management, Jiang Shu, was quoted as saying that the initiative attempts to “increase volumes and attract more investors from other markets”. This is consistent with Bloomberg commentary focusing on China’s efforts to “challenge the dominance of London and New York”. 

According to the Shanghai Gold Exchange announcement, the initiative has been made to “boost market services”, but given that the SGE is the largest physical bullion marketplace in the world, it has the consequence of providing significant credibility to the concept of gold as money.