Big
Changes Ahead: Gold Just Became Money Again
by
Doug Hornig
Casey’s
Extraordinary Technology
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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.
August 18, 2012
Doug Hornig is a writer for Casey
Research.
Copyright
© 2012 Casey
Research
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