Paul Mylchreest: Gold Collateral: Could the Post-Lehman Reflation be Reaching its Limits?

silver break freeThe greatly under-reported repo market sits at the centre of the banking system and the securities markets.  It is a primary source of leverage and, therefore, risk. Time after time, the risks remain hidden until events cascade beyond the point of no return.  Stability in the repo market depends on confidence in repo-counterparties (which can evaporate at near light speed, e.g. Lehman, Bear Stearns, MF Global and LongTerm Capital Management), confidence in the valuation of collateral used in repo loans (remember sub-prime etc) and a sufficient pool of acceptable securities (e.g. Treasuries, MBS, etc) which can be pledged as collateral.
In stressed market conditions, liquidity crunches, declining collateral values and re-hypothecation (i.e. re-useof the same securities as collateral by more than one party) can undermine this market. This results in capital being wiped out, a run on collateral and the telltale sign of spikes in “fails-to-deliver”, when a scramble to post eligible securities ensues.
A surging gold price, backwardations and shortages of physical bullion are proverbial “canaries in the mine” regarding an overstretched system.

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  1. certainly squares with everything else. we all have our chairs outside with our bags of silver and gold. Now we just need to watch all the mongoloids wace for the exit at the same time when this thing finally goes.

    • Wait, CDL!  Don’t forget that LARGE bowl of popcorn and the ice chest of beer.  We gotta watch this show in style.  :-)

  2. The debt bubble is heading for implosion, good luck stopping it.

  3. CDL …i’ve noted you in zerohedge ..(being Cdn also) …i think we are all suffering from burnout ….its obvious the crap will hit the fan…but the entrenched 10% are not going to let go of their priveledged position without a fight …and there will be a great amount of suffering to we and ours ……i’d more interested in trying to find some way to change whats happening in Canada now …rather than gloating about the ‘unfortunates’ who don’t see it coming …any thoughts?

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