I would be the last person to suggest passing international rules on anything is easy.
Heck, it’s difficult enough to get my family to agree to holiday plans.
Therefore, it should come as no surprise that the new Basel III international finance rules on banking are being implemented in fits and starts.
First, the good news for gold bulls…
Business Day has reported South African Finance Minister Pravin Gordhan recently approved the nation’s final interpretation of the capital guidelines provided by the Basel Committee on Banking Supervision.
Furthermore, the Basel Committee recently released a progress report stating the new rules have resulted in the banks of various countries — including Singapore, Japan, and Switzerland — boosting their capital reserves.
“The number of member jurisdictions that have published the final set of Basel III regulations effective from the start date of January 1, 2013, is 11. These include Australia, Canada, China, Hong Kong, SAR, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa, and Switzerland,” the Basel Committee confirmed.
Canada recently announced its banks were ahead of the curve, since they will be ready to fully adopt Basel III starting in 2013.
But perhaps we are getting ahead of ourselves. Let me explain what Basel III is — and why it is so important to gold.
“Zero-Risk” Gold
The biggest catalyst for gold is a massive reevaluation by the Basel Committee of Bank Supervision.
BCBS sets the international rules for banks. They have reacted to the 2008 debt crisis by changing the game for collateral.
The new rules mean Tier 1 collateral, or assets, will have to rise from 2% to 7% of loans. This means the banks will have to hold more money — or lend less.
It All Began…
After the gold crash in the 1980s, the Basel Committee rated gold as a “risky” asset, and government bonds and real estate as “zero-risk.”
Over the course of time, things changed: Real estate has crashed; sovereign bonds in many places like Greece and Spain are junk.
So now the committee is trying to correct that mistake by rerating gold as a Tier 1 asset, or “zero-risk” collateral — the same as sovereign bonds.
Gold As Collateral
Currently, gold is rated as a Tier 3 (or third-class) asset. This means banks can only carry 50% of its market value as capital.
Needless to say, this inhibits the desire for banks to hold gold. The more Tier 1 (or first-class) assets a bank has, the more money it can lend.
But the Basel Committee is turning gold into a Tier 1 asset so it can be carried at 100% of its value.
This would double the value banks place on gold — almost overnight.
And as I’ve noted above, it’s already happening…
Exter’s Golden Pyramid
John Exter (1910-2006) was vice president of the Federal Reserve Bank of New York. Among other things, Exter is credited with creating the Central Bank of Ceylon.
He is best known for his Golden Pyramid.> It is a simple visualization of risk.
Gold is the least risk/most stable value at the point, while asset classes on progressively higher levels are more risky at the top.
The chart is also representative of the size of riskier assets in the world: the higher and bigger on the chart, the more of the asset there is worldwide, and the greater its total value…
All gold ever mined will fit in two Olympic swimming pools. Compare that to the size of the derivative market, which is estimated to be 1,200 trillion dollars, or 20 times the global economy — but nobody really knows.
Risk Off
During boom times, money flows from the bottom of the chart to the top. During busts, money flows from the top to the bottom.
Right now, the world is in massive debt and denial.
This is why Basel III is attempting to reduce risk and revalue gold as “zero-risk” collateral.
The new rules are already being implemented, but will really get going after January 1. Over time they will be phased in by every country that offers debt on the international market…
It is time to take advantage of the sell-off in gold. Look to the future. Learn more in this free report.
Happy New Year,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
