Saturday, June 30, 2012

Will Gold Finally Become Tier 1 Capital?

In a previous post I discussed what the Bank of International Settlements is, what Tier 1 capital is and how it relates to gold.

Today we examine the BIS' review of Basel III and how it may effect gold if it becomes Tier I capital.

From Stratrisk:

The Basel Committee for Bank Supervision (BCBS) is about to decide something crucial to bankers, sovereign nations, and gold investors alike.
As part of the Bank of International Settlements (BIS), the BCBS is reviewing the upcoming new Basel III rules. That may sound arcane to you but I promise it is not. Though rarely discussed in the mainstream press, the all-important Bank of International Settlements is essentially a global central bank to the world’s central banks. Its goal is ostensibly to provide global stability to the monetary and financial systems.
In a surprise twist that only a few years ago would have been considered preposterous, the BCBS is entertaining whether gold should qualify as a full-fledged Tier 1 capital asset. Currently, the precious metal is relinquished to a Tier 3 status, deserving no more than a 50% weighting at that.
Here’s why that distinction is important and potentially astonishing.
Achieving Tier 1 status would credit gold with the recognition it’s been denied ever since Nixon closed the gold window on August 15, 1971.
In essence, it would mark the official recognition that gold is real money. But that’s not the only reason gold is gaining respect. Other factors are brewing that will set the stage for the next leg up in gold prices.

I don’t think we should assume that gold would automatically increase in value if it were to become Tier 1 capital but, It would likely result in not being as quickly sold in market declines as we saw in 2008. During that period, stocks were dropping sharply and banks and institutions were getting margin calls and were forced to liquidate gold to raise capital. The result of this was gold getting beat down along with stock in 2008, at least briefly, before rising again to new highs.

If gold becomes Tier 1 capital, it is central banks finally admitting that gold, is in fact, money. This would make gold a recognized currency and store of value both outside and inside the banking system.

No comments:

Post a Comment