Last night we noted the very concerning rise in margin calls for European banks thanks to collateral degradation at the ECB. This story has become very popular as traders try to figure out which assets were deteriorating rapidly and which banks face immediate cash calls. One thing that came to mind for us was – what about Gold? Coincidentally or not, the last time we saw a big surge in collateral margin calls by the ECB (in September of last year), not only did Gold lease rates explode (implode) but Gold prices fell off a cliff as the squeeze came on from gold liquidity providers pushing prices down to exacerbate the negative lease rates on the gold collateral. The point here is that as margin calls come in from the ECB, we wonder whether banks will be forced to liquidate their gold (last quality collateral standing) to meet the ECB’s risk standards. The key will be to watch gold lease rates (as we explained here and here) and ECB Margin calls to see if Gold is merely suffering a short-term dip from USD strength derisking or if this is a more broad based meeting of collateral desperation need that might have legs – only to be bought back later. MtM losses combined with collateral calls (as we noted earlier) was never a recipe for success and we will be watching closely.