Big Changes Ahead: Gold Just Became Money Again

By: Doug Hornig | Fri, Aug 17, 2012
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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.

 


 

Doug Hornig

Author: Doug Hornig

Doug Hornig
Editor: Casey's Gold & Resource Report
Casey Research, LLC.

Doug Hornig

Doug Hornig joined the Casey team as a freelance writer on the former publication What We Now Know, a perfect fit for someone with his wide-ranging interests.  He wrote nearly 125 articles for WWNK between early 2004 and late 2007. In October of 2005, he assumed editorship of the Daily Resource column, to which was added Casey's Daily Resource Plus in 2007. A steady contributor to Casey's Gold & Resource Report, he also writes the occasional article for International Speculator and other Casey publications.

A former Edgar Award nominee, finalist for the Virginia Prize in both fiction and poetry, and a past winner of the Virginia Governor's Screenwriting competition, Doug lives on 30 mountainous acres in a county that just got its first stop light. He is an admitted political junkie, but hates all political parties. Doug has authored ten books and has written articles for Business Week and other renowned publications.

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