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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.
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