Wednesday, February 13, 2013

BIS Rejects Gold as Tier 1 Asset (For Now)

In posts here and here I've discussed what had been the possibility that the Bank of International Settlements would modify the Basel III accord to include gold as a Tier 1 asset. This would have meant that banks could value gold at 100% of its value rather than the 50% for the purpose of calculating its capital levels. In 2008 during the crisis banks were often forced to liquidate gold holdings to meet capital requirements as other assets (generally real estate securities) declined in value. If the BIS had elevated gold to a Tier 1 asset it would have been international recognition that gold is money. You may recall 18 months ago that Ben Bernanke, the US Fed chair, answered "no" that gold was not money.

The change as proposed would have gone into effect January of this year. There had been much written about it in the last year so I was surprised not to read anything this year about the change. When I dug around the BIS website I could find no press releases announcing this monumental change in banking. Turns out for good reason. It didn't happen.

From the FAQ's document at the BIS website, page 22 of the PDF:

 4.2 Basel II paragraph 145 sets forth a list of eligible financial collateral that
includes gold, with a supervisory haircut set to 15% in paragraph 151. To the
extent that gold is not included in the revised paragraph 151 under Basel III,
industry seeks clarifications in this regard.
Paragraph 145 has not been modified by Basel III and so, gold remains as eligible collateral.
It was an oversight not to include gold in the headings of paragraph 151. Gold is still eligible collateral and it retains the haircut it previously had of 15%.

I have to admit I'm somewhat confused given my understanding was that gold was valued at 50% prior to Basel III rather than 85% (100%-15% haircut). Regardless, the key words are, "retains the haircut it previously had", meaning the BIS has not officially changed its view on gold. Its interesting that the change did not happen as expected and that it apparently has happened very quietly. I'm very much "plugged in" to what's going on and have not seen any stories on it until today when Stephen Leeb on KWN mentioned:

Obviously there would be an even bigger flight from the dollar and into gold right now if Basel had ruled the other way.  Imagine a world in which the US dollar is no longer the reserve currency.  That day is coming.  Under those conditions QE becomes tremendously difficult and interest rates explode....

If the US dollar is not the reserve currency, the US will be in big trouble.  When the yuan takes over and backs their currency with gold it will be lights out for the dollar.  You will see a panic out of the dollar as that comes to fruition.  So there is this desperation by the US to keep gold from rallying, and to keep gold from qualifying as anything that has to do with a basket of currencies. 
 This may be the reason that the BIS didn't change gold to Tier 1. As I mentioned in my first post regarding this subject:

  • Banks are being forced to sell gold to raise Tier 1 assets.
  • Gold is sold to buy Treasuries.
  • Demand for Treasuries keeps interest rates low (Bond prices and yields move in opposite directions.
  • Therefore central banks likely fight gold as a Tier 1 asset to keep price support of Bonds.

In other words, If banks were able to use gold rather than sovereign bonds like US Treasuries, then demand for those bonds would go down, the yields would move up, making the financing of ever increasing deficits that much more difficult at a time when western central banks are attempting to print their way out of a depression. But that could change. If a global bond crisis hits the BIS may suddenly change its mind if it means valuing gold at 100% will keep major banks from failing. If you believe as I do that the next currency regime will somehow be tied to gold under some form of gold standard then this is a likely outcome at some point in the future.

Despite the BIS not making gold a Tier 1 asset now, I believe it will be at some point in the future. Gold has grown in importance not just as an inflation hedge for your local currency, but because it will likely provide a wealth preserving bridge between today's currency regime that is dominated by the US dollar to whatever regime emerges as the USD loses its reserve currency status.

Imagine the alternative. Venezuelans awoke earlier this month to the news their savings had been devalued by 46%.


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  2. Great article. Thanks a lot, for helping to find information about including gold in CET1, cause it realy lack of it.

    Concerning the problem.. US won`t allow to hit the dollar regime in that way.. They have many possibilities to stop it..