“The gold standard has one tremendous virtue: the quantity of the
money supply, under the gold standard, is independent of the policies
of governments and political parties. This is its advantage. It is a form
— Ludwig von Mises, from Economic Policy
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.
for The Daily Reckoning