By Doug Hornig, Casey Research
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.
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