Inside London

July 18, 2014 8:09 am

Gold moves where dollars fear to trade

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There is a quiet, but growing, market for trade settlement in gold

What a grand thing it is to control a global currency.

The whole world wants to use your notes, those irredeemable, unsecured, zero-coupon loans to the US Federal Reserve, while governments everywhere measure their own reserves in the value of Treasury bills they have bought. Oh, and no international bank can operate without access to the US money markets.

Looked at this way, it is remarkable that the authorities have not woken up before. Well, they have now. The banks, and particularly the foreign banks, have long been fair game for ambitious officials across the spectrum of US regulators, but the $9bn hit on BNP Paribas is a new high water mark.

Once this process has started, it is hard to stop, since lower fines for similar offences imply weak regulation. Meanwhile, the US administration has started wielding its currency as a political weapon, imposing sanctions on thousands of individuals, as well as companies and countries, most recently against Russian oil companies.

This may seem painless for the US, and no other currency is remotely suited to oust the greenback, however much they dream in euroland. But change is afoot, as John Dizard explained in FTfm this week. Gold is absurdly expensive to use as a medium of exchange, set against the microseconds it takes to transact through JPMorgan’s correspondent bank. But if JPMorgan is instructed by the US government to block payments from your account or to your creditor, those microseconds can turn into months.

The result is a quiet, but growing, market for settlement in gold, in those parts of the globe where traders who do not share the US view of the world fear the consequences unless they do.

This physical metal may merely wear a new label in the same bank following the transaction, and the more it happens, the cheaper the process becomes, and the more ways round US hegemony will be found. Using the dollar as a political weapon will (eventually) kill the goose that lays those golden eggs.

Holiday reading

Braced for the bad guys to triumph in Flash Boys, this year’s must-read expose, there is a pleasant surprise (spoiler alert) when author Michael Lewis’s heroes come out on top. Even more of a surprise, the good guys get help at a key moment from, of all places, Goldman Sachs. This may explain why Mr Lewis feels he can get away with being quite so beastly to the Squid earlier in the book.

His heroes are trying to build a stock exchange that puts investors first, exposing the racket that is the combination of “dark pools” and high speed traders. The dark pools are the in-house matching systems run by banks, which suspiciously often are deemed the best place for their customers to trade, despite better terms outside in the daylight. The high speed traders are computer algorithms built to withdraw an offer in less time than it takes you to press the button to accept it.

Still, it is not all bad. A side-effect has been an extremely keen two-way price in private investor-sized amounts of stock in the form of orders left on view as bait by HSTs for the institutions. The “honest” exchange, the Investors Exchange or IEX, is currently looking for $75m to compete head-to-head with the others. Its founders considered the domain name until someone pointed out that it might attract a different sort of traffic . . .

Consenting adults?

You might have thought that businesses and their insurers would draw up contracts to both parties’ satisfaction, as businesses do every day.

You would be wrong. The basic contract law is a century old, and was given such a raspberry by the Law Commission that the Treasury is promising legislation, albeit watered down.

As things stand, there are so many ways for insurers to wriggle out of claims that defenders of the status quo are reduced to arguing that they frequently do not enforce their legal rights. So, here’s the contract with my new insurance company. Fire, Auto and Marine sounds good, doesn’t it? You guarantee to pay the premiums and I’ll pay the claims. If I feel like it.

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