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.
If you haven’t done so already, it’s time to get informed on gold and begin adding it to your portfolio.
Doug Hornigfor The Daily Reckoning
Doug Hornig has authored multiple books and his work has appeared in Business Week and more. He is a regular contributor to “What We Now Know” – a the weekly e-letter from Casey Research.
Outstanding news! I read the Daily Reckoning daily just so (once in a while) I get insightful reports like this one. Thank you!
“And that translates into higher global demand for the metal next year, and a concomitant increase in its price.”
no. it translates into government demand for gold. and they will tell you what the price is. “gold for us! paper for you!”
The Basel III ruling “can” enable a bank to leverage this useless, barbaric, unedible metal like never before. Simplistic hypothetical: Suppose a bank is doing its job, it lent everything! It hit the reserve requirement limit and can’t lend anymore. It has $1K cash and $1K in gold. The gold is usless. But the $1K cash “could” be put to work providing goods and services. But, alas its stuck. However, if bullion banks push up the gold price, some cash is liberated and leverage can continue! Banks can use the metal as a fulcrum to levarage more paper. You can’t do THAT with cash. So at least in theory, gold can be useful after all (just dont try to eat it)!!
You seem to equate ‘leverage’ with something of actual value. As a movie I recall says, “you have to be rich to even think like that”. The ‘suppose’ part of your argument really cracks me up.
You even put quotes around it. Tell me I’m wrong on that.
Simplistic argument here:
One ounce of gold is ACTUALLY one ounce of gold. Doesn’t change, never has.
What is the value of ‘your word’?
I would liken your word to you ‘leveraging’ your BMW or whatever useless relic you chose to ‘bargain’ with.
I’m sorry, you must not have tried eating a BMW. Hope that piece of ‘upgraded’ upholstery is pretty tasty and filling for you and the kids.
To get to the point, it depends on what YOU value something at. The entire planet has valued gold above ‘your’ word for the last 5000 years.
If you would not ‘exchange’ or ‘leverage’ your BMW for some water,(and I do have a certainty on this) then my guess is that you and your family, would become dessicated before the BMW.
Just my opinion. And I HAVE been there.
Scott, I am being quite sarcastic about the utility of gold. However, I dont know about the BMW, a leather seat may taste like jerky. But from a fiat perspective, this is a mechanism to extract more use from it (gold) without having to give it up. But heaven help this bank if the gold price falls!
Prompt response, amazing these electronic things.
With gold, you are the bank. It’s worked for me more thane once.
I did pick up the sarcasm (dimly), but felt compelled to respond with the contrarian (sic) view.
I have been all over the world, and the Dollar used to talk a lot, but the way the clowns of the 535 talk, and especially the FED , we are, as a society, doomed (Shades of the Mogambo!!!). Notice the exclamation points.
With so many voices speaking about a possible confiscation of gold by the Us goverment, wouldn’t this make it easier? the banks would be doing the goverments homework buying gold and then the Fed could say “we think that your gold will be safer in our vaults” and take it?
Just a tought…
this all sounds good, But as i recall years when gold was around $800.00 an ounce, the GOV convinced OPEC OIL and Berzil to be paid in gold, in stead of paper usa dollars, valued at $800.00 an ounce, Then they devalued gold to $385.00 an ounce, causing Berzil to default on their loan, and loose the lower amazon baysen,that was put up as colateral, now they have put up the upper baysen,just so they can operate. They don’t want Gold anymore. Then OPEC got mad and told the USA that they wanted to be paid in EURO”S
Please inform us if the banks have to have bullion (physical) or say, stocks in representative forms such as (GLD).
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