Collateral is an asset pledged by a borrower to secure a loan. The lender can seize the collateral in the event of a default of the borrower. An example of collateral is a house bought with a mortgage. The use of collateral lowers the risk associated with the loan. This is why loans secured by collateral typically have lower interest rates than unsecured loans.

Gold as Collateral

For many decades, gold was the reserve currency in the global monetary system. When the gold standard was ended, gold’s role as money and collateral faded over time. However, since the Great Recession, gold is increasingly being used as collateral around the world. For example, the new capital requirements implemented by Basel III enhanced the role of gold as collateral. It should not be surprising, given its role as a monetary asset. Indeed, gold is a high-quality and liquid asset. Importantly, the gold market is highly liquid across time zones.

In other words, contrary to common beliefs that gold is not a productive asset, it may be used as collateral, as well as being lent and borrowed. The cost of borrowing gold is the gold lease rate, while the interest rate on a U.S. dollar loan secured by gold as collateral is called the gold forward offered rate.

We encourage you to learn more about the shiny metal – not only about its function as collateral, but also how to successfully use gold as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.