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International Banking Regulations, Basel-III, Support Gold

It seems the financial world is waking up to what many of you already knew; that Gold can provide safety in a time of turmoil.  For many years, Gold was the Rodney Dangerfield of assets, as it got “little respect” from the financial community.  But after thriving during the financial crisis of 2007-8, the Bank for International Settlements (BIS) began to realize how important Gold can be to bring stability to a broken financial system.

Basel-III Guidelines

The BIS has a regulatory body that meets in Basel Switzerland, and has come up with a series of directives for large international banks.  These directives were called Basel-I, Basel-II, and the soon to be enacted Basel-III guidelines.  What is unique about each of these, is that they have recognized the increasing importance of Gold, as a reserve on bank balance sheets.

Golden Asset

Gold used to be viewed by the banks as a risky asset, considered “Tier-3”, whereby only 50% of the market value could be counted for reserve purposes.  Of this policy, Frank Holmes of US Funds said:  “Gold has historically been classified as a Tier 3 asset. When determining how much money a bank can loan, the bank’s gold holdings have traditionally been discounted 50 percent of the current market value. With value cut in half, banks have little incentive to hold gold as an asset.” (Frank Holmes, US Funds).  Therefore, Gold has not played a critical role (officially) in major world banking reserves – until recently.

Under Basel-III, some of which goes into effect on April 1, 2019, Gold is no longer considered a “Tier-3” asset, but is bumped up to a “Tier-1” asset, and valued at 100% of market value.  This makes Gold a “riskless” asset, in the eyes of world banking authorities.  Financial researcher Alasdair Macleod explains it this way:  “Anyone who understands gold’s historic role will grasp the importance of the argument behind extra bank leverage. Direct ownership of bullion by a bank is superior to holding the fiat money issued by a central bank. It should increase confidence in any bank and the system as a whole. Given relative values, bank purchases of bullion will drive the value of gold as Tier 1 capital up relative to other qualifying assets, increasing its desirability for regulatory purposes further without a gold-owning bank doing anything.” (Alasdair Macleod).

Purchasing Gold

This partially explains why Central Banks worldwide have been purchasing Gold in record amounts the last few quarters, as they realize the cost to purchase will likely rise when commercial banks begin holding Gold as a reserve on their balance sheet.  In some countries such as the United States, Gold was already recognized as “Tier-1”, and was reckoned as such in bank reserves.  But across many nations in Europe and elsewhere, Gold is just now beginning to be acknowledged for the safe-haven characteristics it has been known for elsewhere.

Some experts believe that as Basel-III begins to take effect, an increase in the demand for Gold from large banks will ensue.  We could see demand increase by 500-1000 tons per year, on an already tightening amount of available supply.  Some of this increase in demand has already begun to manifest, causing Gold to rally during a period of economic conditions often associated with a Gold decline.  The fact that Gold has continued to show strength in spite of interest rate increases, bodes well for a future of likely interest rate declines.

Support for Gold

While some are forecasting a swift and significant jump in the fiat price of Gold due to Basel-III, what is more likely is a gradual building base of support for Gold, as banks continue to strengthen their balance sheet with Gold.  But it is important to recognize what the authorities in the world of finance now officially acknowledge, that Gold is essentially a risk-free asset to own in times like these.  But this is not an entirely new revelation, but rather a return to what many in history have told us before.  One such individual was the American economist and former board member of the Federal Reserve, John Exter.  John was referred to by some as one of the few “…honest central bankers”, for his candid discussion of risks that existed in the world monetary system.

But perhaps what John is most famous for, was his graphical depiction of what became known as “Exter’s Inverted Pyramid”.  His original pyramid has been updated several times through the years, allowing for newer and riskier financial inventions that did not exist in his day.  But the principles he espoused and illustrated with the pyramid are still valid today and are apparently being considered by those drafting banking regulations such as Basel-III.

Sometimes we have to pay attention to what leaders are doing, more than what they are saying.  While there is much discussion about paper money, electronic money and crypto-currencies, governments and central banks around the world have been accumulating record amounts of precious metals.  It is as if they want to be protected from whatever they see up ahead.  It is not always in their interest to broadcast what they are doing, which can help keep metals prices low while they accumulate.  But astute observers have been stacking Gold and Silver in step with leaders and central banks around the world.  By doing so, the common person is able to take advantage of central bank efforts to drive down the Gold price.  Someday soon, this effort to hold down prices will cease, due to either unwillingness or the inability to do so.  They might have their hands full with other things, and unable to focus on manipulating the metals’ sphere.

Just this week, central bank manipulators sold large amounts of “paper gold” on the futures exchanges, thereby forcing the price of Gold back to it’s 50-day moving average.  This tactic has often been done just before something believed to be positive for Gold occurs, in this case, the further implementation of Basel-III.  Meanwhile, large amounts of Gold are changing hands on world markets, to the tune of $250 Billion per day.  While they talk about stocks incessantly on financial news channels, the amount of activity in precious metals is much greater.

If the leaders of the financial world are talking about stocks while purchasing Gold, should we pay closer attention to what they say, or to what they do?  I believe John Exter was correct.  When risks increase in the world of high finance, Gold is properly recognized as the riskless foundation asset holding it all together.  If this is true for nations, banks, and governments, then it is also true for the rest of us.