Gold is gaining currency -- quite literally. On Monday, the European Parliament announced that it will allow central counterparties, or CCPs, to use gold as collateral. Translation: Europe is comfortable with market participants putting up gold as a guarantee against their trades at the clearinghouses that act as a counterparty to buyers and sellers (JPMorgan Chase (NYSE: JPM) made the same decision in February). Here's what this decision means for gold investors.
The announcement comes at the same time that gold is achieving record highs in euros. The flare-up in Europe's sovereign debt crisis is creating demand for gold. European (and U.S.) investors increasingly perceive the precious metal as a safe haven as they lose faith in the value of the major reserve currencies and in the economic stewardship of their political leaders. The European Central Bank itself shares some of these misgivings: Last week, it warned European governments that if Greek government bonds suffered any modifications (i.e., a form of default) the bank would no longer accept the bonds as collateral against the liquidity that has been a critical lifeline for Greek banks.
Long-term bearish, short-term bullish
It strikes me as a bit odd to accept an asset as volatile as gold as collateral, and I continue to believe that gold is overpriced and is due for a painful correction at some point. Nevertheless, gold's short-term trend looks bullish (by short term, I mean roughly three to 12 months). Personally, I'm not interested in playing that game, but gold's growing acceptance as a monetary asset adds to the momentum carrying investors who own the SPDR Gold Shares (NYSE: GLD), the iShares Gold Trust (NYSE: IAU), the Sprott Physical Gold Trust (NYSE: PHYS), and other gold products.
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