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Gold almighty? JP Morgan's a believer

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Nick Ut / AP / File

(Read caption) In this 2008 file photo, gold coins and bars are shown at California Numismatic Investments in Inglewood, Calif. JP Morgan announced Monday that it will accept gold as collateral, and guest blogger Douglas French asks: Will bank employees even know what the stuff is?

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J.P. Morgan Chase announced that it will allow clients to pledge gold as collateral for some transactions.

The Wall Street Journal Reports:

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By making the announcement, J.P. Morgan is effectively saying gold is as rock solid an investment as triple-A rated Treasurys, adding to a movement that places gold at the top tier of asset classes. It also is trying to capitalize on all the gold now owned by hedge funds and private investors that is sitting idle in warehouses.

Some stock exchanges have agreed to accept gold as collateral for trades and there is a movement to have gold counted as a Tier-1 asset for banks along with government bonds and currencies.

If gold owners can borrow against their gold they may not be as quick to sell it when they need liquidity. But then, when the price of the metal declines, margin calls will exacerbate price moves to the downside.

The WSJ writes that its unclear as to whether J.P. Morgan will require that borrowers hand over the physical bullion to the bank to pledge it as collateral. I suppose there’s a way for gold to be pledged if its stored with a third party and the third party acknowledges that the metal is encumbered. But for those looking for a loan against their Krugerrands, plan on having to park them at the bank. And also, based on my experience, many bank employees aren’t familiar with gold, so you may have to explain what it is, that it has value, and what the current price is.

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