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Gold: The Collateral of Last Resort

By Emil Kalinowski, Manager, Metals Market Research, Wheaton Precious Metals International

Published on March 20, 2020

In 2020, gold investors find themselves sailing the wine-dark sea, with currents inexorably pulling the good ship into a strait flanked by Scylla and Charybdis.

The imagery is, of course, courtesy of Homer from his epic poem Odyssey, in which Odysseus and his men have no choice but to sail through a chokepoint on which two mythical, monstrous sentries stand. Scylla was a six-headed sea monster that had a bad attitude and a taste for sailors. Charybdis? A ship-eating whirlpool. Scholars identify Italy’s Strait of Messina – bracketed by the island of Sicily and the Calabrian coast – as the geographic inspiration for the legend. This author identifies the year ahead – bracketed by fear and monetary disorder – as the economic inspiration for the metaphor.

THE MALFUNCTION OF THE GLOBAL MONETARY ORDER HAS, SINCE 2007, PLACED A PREMIUM ON COLLATERAL.

The malfunction of the global monetary order has, since 2007, placed a premium on collateral. Before that fateful year, the financial institutions that funded an ever-expanding cross-border movement of goods, people and capital did so on an unsecured basis. Short-term interbank loans required to square books, meet regulatory requirements, extend credit and speculate in markets were, indeed, unsecured. The network policed itself; its exponential growth smoothed over inconsistencies, incentivised banks to cooperate and ensured the order’s functionality.

But during the global economic crisis of 2007–09, banks that met all statutory capital requirements had, rather unexpectedly, become insolvent and then needed rescue, dismemberment or burial. The survivors turned rather squeamish about it all. Uncollateralised funding became unpalatable.

THE FINANCIAL SYSTEM, WHICH HAD EVOLVED OVER FIVE DECADES TO RELY ON UNSECURED FUNDING, WAS SUDDENLY FORCED TO HAVE AN EXISTENTIAL LEVEL OF INTEREST IN COLLATERAL.

The financial system, which had evolved over five decades to rely on unsecured funding, was suddenly forced to have an existential level of interest in collateral. The problem was, and remains, that there was hardly enough collateral to back the funding that supported the level of economic activity that then existed, let alone the sustainable expansion of it.

This dilemma became all the more acute when the once-in-a-lifetime banking crisis repeated itself just a few years later, this time across the sovereign bond markets of nations that bordered the sea Odysseus sailed. Then, it happened again, just two years later, this time the epicentre was in emerging markets, of which China was the most prominent victim.

THEN, IT HAPPENED AGAIN, JUST TWO YEARS LATER, THIS TIME THE EPICENTRE WAS IN EMERGING MARKETS, OF WHICH CHINA WAS THE MOST PROMINENT VICTIM.

This is where gold enters the picture; it is the collateral of last resort. Gold has over the past 13 years developed a relatively consistent pattern. As the preconditions for the next financial denouement proliferate across the horizon, investors begin to batten down the hatches by placing a higher value on collateral, be it US Treasury securities, German bunds, or gold. These safe harbours appreciate either absolutely or relatively, the change in valuation a consequence of the rising anxiety levels felt by financial institutions. They fear being caught out, of being short funding, of lacking collateral to post. This is the fear of being pulled underwater. This is Charybdis.

Gold hasn’t been a cross-cultural monetary standard for millennia just because it is pretty to look at. It has a job – one that it is exceedingly qualified for – and that is to be accepted as money when other financial instruments that were thought to be money are revealed to be credit. That is when gold is sold. Sacrificed. This is Scylla.

During the global economic crisis, the demand for gold rose as fear escalated but then suffered severe bouts of selling when what was thought to be money-good (i.e. mortgage-backed securities) was repudiated. The same sequence was repeated in 2011–12. Sovereign bonds that had been considered money-good were being given haircuts by Sweeny Todd. What is there to sell that will be accepted by everyone, everywhere, in every era by every generation and culture? The answer is obvious.

THIS IS WHERE GOLD ENTERS THE PICTURE; IT IS THE COLLATERAL OF LAST RESORT.

The cycle is repeating itself today. In the fourth quarter of 2017, the reflation, known as globally synchronised growth, reached its apex. Throughout 2018, different pieces of the reflation edifice sloughed off. First, esoteric money markets began to crinkle. Then, emerging markets currencies crackled. By the third quarter, growth was no longer synchronised. By the fourth, it wasn’t even growth. In 2019, central banks began to pause interest rate hikes, then began to cut them outright. The US stopped its quantitative tightening in August, and by September, it was expanding its balance sheet at the fastest pace this side of quantitative easing. Gold rose throughout all of this. Fear. Disorder. In early 2020 the new managing director of the International Monetary Fund gave a speech in which she strongly implied the world was at risk of a global depression. Fear. Disorder. Now Covid-19.

If this general economic deterioration crosses over into an outright, interbanking liquidity panic, it should not surprise anyone that gold will be sold.

Keep an eye on the collateral markets, not the stock markets. Are central banks comfortable holding their US Treasury securities in custody with the Federal Reserve? Or are they pulling them to subsidise the local banking network that may be experiencing difficulties in securing Treasuries on the open market? Are primary dealers freely distributing Treasuries? Or are they hoarding them for their own use? Are banks returning collateral as part of their overnight operations? Or has a disorder convinced them to fail to deliver, even at penalty rates? Are overnight rates in the repurchase agreement market narrowing? Or are they spreading outwards from the unsecured funding offered by the Federal Reserve?

IF THIS GENERAL ECONOMIC DETERIORATION CROSSES OVER INTO AN OUTRIGHT, INTERBANKING LIQUIDITY PANIC, IT SHOULD NOT SURPRISE ANYONE THAT GOLD WILL BE SOLD.

Atop the mast, looking down the horizon as far as I can, it seems like gold investors may confront volatile waves in 2020. But one day, likely not that far off, the calm waters of inflation will present itself and will make gold’s sailing smooth.

EMIL KALINOWSKI joined Wheaton Precious Metals Intl. in 2014 as Manager, Metals Market Research. His present focus is on the 2007 malfunction of the monetary system and its continuing disorder. He earned the CFA designation in 2013 and holds a Bachelor of Finance and MBA from Arizona State University. He previously held positions at State Street and Goldman Sachs. Presently living in the Cayman Islands, he is also radio talk show host and newspaper contributor but ratings and letters to the editor suggest he’s probably going to have to keep his regular job.

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Lee Jia Yi

OPERATIONS & ADMIN EXECUTIVE
Before joining SBMA, Jia Yi worked as an Admin & Reporting Officer in her previous role. She holds a Diploma in Business & Social Enterprise from Ngee Ann Polytechnic. Jia Yi is responsible for managing and maintaining physical and digital files in SBMA, supporting invoicing processes, reconciling receivables and payables, coordinating meetings and conferences. Additionally, she will provide support to the team and assist the Business Director in managing the Association’s office operations and general administrative activities.

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Emily Oh

OPERATIONS & ADMIN EXECUTIVE
Emily Oh is the Operations & Admin Executive, a seasoned professional who values teamwork and effective communication. She is skilled at adapting to new challenges and takes a proactive and resourceful approach to every task. Before joining SBMA, Emily had experience coordinating international travel arrangements and spearheading community initiatives. Her role at SBMA will be providing operational and administrative support for projects and other matters to the team.

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Clara Chang

MARKETING & COMMUNICATIONS EXECUTIVE
Clara Chang joins SBMA as the Marketing & Communications Executive, enriching the team with her extensive experience in content creation, social media management, and digital marketing. Prior to joining SBMA, Clara held the position of Marketing Executive at her previous job. She holds two bachelor’s degrees from the University at Buffalo, one in International Trade and another in Geographical Information Science. Her core duties will include maintaining the SBMA website, managing the quarterly Crucible newsletter, among other responsibilities.

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Mr John Levin

Global Metals
TD Securities
John Levin is the Head of Metal Sales & Trading – APAC at the Toronto Dominion Bank’s Singapore office. Prior to this role, he devoted seven years to leading precious metal sales for the ANZ banking group in his home country, Australia. Notably, from 2009 to 2011, John played a significant role on the management committee of the London Bullion Market Association while serving as the Head of Precious Metals Sales for HSBC Global Banking and Markets in the UK.

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Fabian Lew

MARKETING & COMMUNICATIONS OFFICER

Fabian was a Business Development and Marketing Associate before joining SBMA. He graduated from Singapore Management University with a Bachelor’s degree in Economics.

He has joined SBMA since February, 2022.

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Margaret Wong

BUSINESS DIRECTOR

Margaret Wong, Business Director at SBMA (Singapore Bullion Market Association), brought valuable experience from her previous role at the World Gold Council (WGC). Her tenure at WGC provided her with extensive exposure to the gold community in Singapore and the broader region. This background has been instrumental in establishing strong working relationships within the industry.

Margaret’s role at SBMA encompasses a diverse range of responsibilities. She oversees office management, business support processes, finance, and administrative functions essential for the smooth operation of the team and management committee. Additionally, Margaret handles membership matters, member communications, and addresses public inquiries related to SBMA.

One of Margaret’s key responsibilities is coordinating with the Event Management Company for SBMA’s prestigious annual event, the Asia Pacific Precious Metals Conference. This flagship conference plays a crucial role in the industry, making her involvement pivotal in its success.

Described as resourceful and self-motivated, Margaret Wong brings a wealth of skills and experience to her role at SBMA, ensuring efficient operations and effective engagement within the precious metals community in Singapore and beyond.

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Albert Cheng

Chief Executive Officer

Albert Cheng joined the World Gold Council in March 1993 as a Regional Manager, becoming Managing Director, Far East in 2003. He retired at the end of March 2015 and was subsequently named its Advisor. He has also been an International Advisor to the Shanghai Gold Exchange since 2002.

His marketing career began with Dentsu Young & Rubicam, Hong Kong in the early 80’s. He began gold marketing in July 1985 when he joined the Royal Canadian Mint as a Regional Manager for Southeast Asia.

He was appointed honorary CEO of SBMA in November 2015. He is responsible for the success and strategic development of SBMA, represents the interests of the Association, and is responsible for all the legal and regulatory aspects of the work of the Association. He is the primary contact for regulators and government bodies on bullion market development.

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Ms Pawan Nawawattanasub

CEO
YLG Bullion Singapore Pte Ltd

Pawan is the CEO of YLG Bullion Singapore and founder of YLG Bullion International. She has almost 40 years of experience in the jewellery industry and established YLG in Thailand in 2003. In 2012, she brought YLG to Singapore. She sits on the Board of Directors of the Thailand Gold Traders Association, the Thailand Futures Exchange’s Arbitration Committee, and the Rotary Bangkok committee. She holds a master’s degree in Political Science.

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Mr Shaokai Fan

Head of Asia-Pacific (ex China) and Global Head of Central Banks
World Gold Council
Shaokai Fan is the Global Head of Central Banks at the World Gold Council, responsible for advising governments on gold matters, and enhancing the gold market through engagement, dialogue, and thought leadership. He works directly with central banks and sovereign wealth funds on investment considerations. Prior to this position, Shaokai held multiple roles at Standard Chartered Bank, including Director for Asia Strategic Initiatives and Associate-Director for Public Sector coverage. Shaokai holds a Masters of Public Administration from Columbia University and the London School of Economics, and an undergraduate degree in finance and economics from New York University.

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Mr Alan Liew

Head of Bullion & Commodities Trading
United Overseas Bank Limited
Alan is Head of Bullion and Commodities Trading for Group Trading in Global Markets, United Overseas Bank (UOB). Alan joined UOB and started the bank’s commodities trading business in 2014, previously he spent eight years in Standard Chartered Bank (SCB) trading both precious and base metals. During his tenure at SCB, he obtained the SGE gold trader licence and was part of the pioneering team for the SGE business and the FX quantitative trading team. Prior to trading, he worked for Monetary Authority of Singapore in the Financial Risk Management Division. He holds a BSc (Hon) in Computer Science at National University of Singapore and a MSc in Financial Engineering at Nanyang Technological University.

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Mr Nikos Kavalis

Managing Director
Metals Focus Singapore Pte Ltd
Nikos Kavalis is a founding partner of Metals Focus. He has over 20 years of experience in precious metals, having previously worked for the Royal Bank of Scotland and GFMS. Since September 2019, Nikos has been based in Singapore, where he also runs the local subsidiary of Metals Focus.

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Mr Nuttapong Hirunyasiri

CEO
MTS Gold Global Trading Pte Ltd
Nuttapong Hirunyasiri is the CEO of MTS Gold Group, one of Thailand’s top 10 companies and top 3 bullion companies. He started MTS Gold Group’s first overseas office in Singapore and has been expanding the group business internationally. He focuses on product development and innovation for gold investment, with the aim of being a leader in providing the full suite of gold investment services in the ASEAN region.

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Mr Raman Walia

Executive Director, Head of Commodities Sales – APAC
JP Morgan Chase Bank N.A.

Raman is Executive Director and Head of Commodities Sales, APAC, for J.P. Morgan. He joined JPMorgan in 2008 in New York, moved to Singapore in 2011, and helped expand the precious metals business in the region. Raman has an MBA from Cornell University, and likes to travel in his spare time.

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Mr Andrew Clarke

Head of Brink’s Global Services
Brink’s Global Services Pte Ltd

Andrew Clarke is the Head of BGS (Brink’s Global Services) for Singapore, Indonesia, Malaysia and Brunei. He has held various leadership positions throughout his career in secure logistics and risk management with Brink’s, which started in Hong Kong in 2010. Andrew relocated to Singapore in 2018 to expand the precious metals line of business along with Brink’s portfolio of services and industries.

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Mr Kazuya Naoki

Head of Metals, Asia
ICBC Standard Bank Plc, Singapore Branch

Kazuya (Kaz) Naoki is the Head of Metals, Asia of ICBC Standard Bank in Singapore and is responsible for the precious & base metals sales and trading in the region. He joined Standard Bank Plc Tokyo Branch in 2008 and was relocated to its Singapore Branch in 2013 whose controlling stake was acquired by the Industrial and Commercial Bank of China in 2015. Prior to joining Standard Bank, Kaz spent 11 years focusing on commodity trading and risk management with Mitsui & Co in Tokyo, Sydney and London. Kaz has been serving on the SBMA Management Committee since 2016.

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Mr Vinh Nguyen

Head of Precious Metals, Asia
StoneX APAC Pte Ltd

Vinh Nguyen joined StoneX Group in Singapore at the beginning of 2008 and responsible for its APAC precious metals activities since 2019 until now.

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Mr KL Yap

General Manager, Singapore Refining Business Unit
Metalor Technologies (Singapore) Pte Ltd
KL YAP is the General Manager of Metalor Technologies (Singapore) Pte Ltd’s Singapore Refining Business Unit. He joined Metalor in 2013, initially in Refining Sales. In 2014, he became Refining Business Unit Manager, leading the development of a new precious metal refinery. KL was Vice Chairman of SBMA from 2017 to 2021, now serving as Chairman. With a degree in business commerce, finance, and marketing, he brings prior experience from refinery and heavy industries.