CDSs On U.S. Treasuries Written With Payment In Gold

Jesse of Jesse’s Café Américain has written an analysis of a story first webbed by the Huffington Post, about U.S. Treasury CDSs being created that demand payment in gold. Most of his post consists of wondering who the counterparties are, and what system risks are. He does point out the possibility that the bullion banks, such a J.P. Morgan, are currently short more gold contracts that can possibly be delivered.

The US has more gold than any other individual country, and still values it cheaply at a sub-fifty dollar historical price on its books. If a counterparty fails, it will fail, and a settlement will be arranged. The issue of course, is if some encumbrance of the gold in the US has already been accomplished through unfortunate leases to bullion banks who will not be able to return it.

Indeed this horse may already be ‘out of the barn’ as some evidence indicates that a few banks like JPM are already short more gold and silver than they can possibly deliver under the conditions of the contract without selective default to paper if demanded by their counter-parties.

Myself, I don't understand why payment in gold for U.S. Treasury CDSs, in and of itself, would be causing such a stir. It's a logical decision, given the fact that the U.S. dollar might as well be through if the U.S. Treasury does default. There's a continuity between those and the old Bretton Woods system. Nevertheless, it's raised some feathers.