Whoever Owns the Physical Metal Will Reap the New Pricing Power

"Collateralizing physical Gold, Silver and commodities for liquidity is how human civilization has operated for thousands of years in most of human history." -Eric Yeung

"Regardless of what happens, we expect the increased premium to accrue to usable metal and whoever controls it. " -Vince Lanci

Contents

Executive Summary

Commodities Are Collateral

Metal Has to be Unencumbered

Rehypothecation Costs Money

Ownership Raises the Price

Futures Exchanges Have Risk

Gold, Silver and Hong Kong's Next Step

Executive Summary

By Vincent Lanci and Eric Yeung

We see the LME's Hong Kong token plan as bullish for physical metal. Tokens would provide an enforceable record of who owns and who has pledged each tonne, so the market has to price the metal that is actually free instead of the gross warehouse number. Collateral use gives owners a second reason to hold, so anyone who wants the metal has to pay for its financing value as well as its industrial value. Whether rehypothecation shrinks or grows depends on the rules Hong Kong writes, but either way we expect the premium to accrue to usable metal and whoever controls it. Going forward from here, as the situation unfolds, we would watch physical premiums, lending rates, spot-futures spreads and the share of inventory pledged.

Intro:

The LME's exploration of tokenized metal financing advances a development we have followed for years: physical commodities acquiring a larger role in the credit system. We see this as ultimately bullish for the metals involved. Their owners gain another reason to hold them, while enforceable ownership and pledge records can force markets to price the inventory actually available.