Big Changes Ahead:
Gold Just Became Money Again by Doug Hornig |
August 18, 2012
On June 18, the Federal Reserve and FDIC
circulated a letter to banks that proposes to harmonize
US regulatory capital rules with Basel III.
BASEL III is an accord that tells a bank
how much capital it must hold to safeguard its solvency
and overall economic stability.
It's a global standard on bank capital adequacy,
stress testing, and market liquidity risk.
Here's the important bit:
At the top of the proposed changes is the
new list of "zero-percent risk weighted items,"
which now includes "gold bullion," right after
"cash."
That's the part to take notice of.
If the proposals are approved by regulators
– and that seems likely since adoption of Basel III
will be – then this is a momentous change for the
gold market.
Now banks will be allowed to hold bullion
in their vaults and count it among their Tier 1 assets –
in other words, the least risky assets.
That by itself would be bullish for the
gold price, as banks that recognize gold's unique characteristics
seek to stockpile more of it.
But that's not the whole story…
Gold Regains Money Status
For one thing, Basel III also stipulates
that a bank's Tier 1 holdings must rise from 4% of assets
to 6%.
That means that banks may not only replace
a portion of their existing paper with bullion, but may
use it to meet some of the extra 2% as well.
In addition, this vote of confidence from
the highest monetary authorities gives further impetus to
the remonetization of gold.
In essence, what's happening is that from
now on gold will be considered "money" in virtually
the same way as cash or bonds.
And banks will be given the choice between
holding more of their core assets in history's most reliable
store of value vs. paper backed by nothing more than the
promises of increasingly wasteful governments.
Finally, there is the impact on individual
and institutional investors.
Jeff Clark, in Casey Research's BIG GOLD
newsletter, has been guiding gold investors for years. In
his view, this news looks set to really shake up the gold
market, because as regulators and banks increasingly view
gold as having safety on a par with the various paper alternatives,
it is logical that they will also see the need to beef up
their own holdings.
There are a number of positives for gold
going forward.
Though it remains speculation on our part,
we believe that the net result of Basel III and associated
adjustments to US regulations will be an increased recognition
of gold's safe-haven status across all markets.
And that translates into higher global demand
for the metal next year, and a concomitant increase in its
price.