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Proposed Banking Regulations Would Drive Gold Prices Higher

George Washington's picture




 

There are many, many, many, many reasons why gold prices should go higher, despite claims that gold is in a bubble … and despite the fact that gold prices may be manipulated.

A giant new reason may be heading our way …

Specifically, the central banks’ central bank – the Bank of International Settlements (BIS) – is considering reclassifying gold as risk-free assets as part of the Basel III framework.

As BIS notes in its progress report on Basel III implementation:

At national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.

(See footnote 32 on page 26).

As Russ Norman – CEO of Sharps Pixley – wrote in May:

Banking capital adequacy ratios, once the domain of banking specialists are set to become centre stage for the gold market as well as the wider economy. In response to the global banking crisis the rules are to be tightened in terms of the assets that banks must hold and this is potentially going to very much favour gold. The Basel Committee for Bank Supervision (or BCBS) as part of the BIS are arguably the highest authority in banking supervision and it is their role to define capital requirements through the forthcoming Basel III rules.

 

In short, they are meeting to consider making gold a Tier 1 asset for commercial banks with 100% weighting rather than a Tier 3 asset with just a 50% risk weighting as it does today. At the same time they are set to increase the amount of capital banks must set aside as well. A double win potentially.

 

Hitherto banks have been much dis-incentivised to hold gold while being encouraged to hold arguably riskier assets such as equity capital, currencies and debt instruments, none of which have fared too well in the crisis. With this potential change in capital adequacy requirements. bank purchases of gold would drive up its value relative to other high quality qualifying assets, increasing its desirability for regulatory purposes further. This should result in gold being re-priced to bring it on a par with all other high quality assets.

 

Currently banks have to have core Tier 1 capital ratio of 4% of which will rise to 6% from the beginning of next year. In addition to its store of value merits, central to the argument in favour of gold as a bank reserve is its countercyclical nature to most other assets in that it tends to be inversely correlated. Gold is ideal as it bears no credit risk. it involves no other counterparty and it is no one’s liability. It is a reserve asset diversifier if you like.

 

This is a treble win for gold – it would be a major endorsement of its role in preserving wealth and as a store of value from the highest financial authority, it would lead to significant purchases of gold by major financial institutions and it would lead to a reappraisal of its value with respect to other Tier 1 capital such as quality sovereign debt. Under the new rules gold could become a very significantly larger proportion of a reserve pool which is about to grow very much larger.

 

The 2 questions that come to my mind are when and how much metal – on timing Basel III kicks in from January 2013 with a further tightening in capital adequacy ratios in 2018. That said, it is not yet clear when gold’s re-rating to Tier 1 might take place.

 

In terms of amount of gold that could be purchased that is harder still – if we thought that say 2% of total current Tier 1 capital held by commercial banks globally might be converted into gold (forgetting for a moment about the increases in capital yet to be seen) – this would suggest that 2% of the $4,276 bn would be converted to gold. That is equivalent to $85 bn in gold which at current market prices is equivalent to 1,700 tonnes of gold.

 

Another way of looking at this is to consider that commercial banks would be holding gold for precisely the same reason that central banks do – and the largest 110 central banks in the world have 16% of their reserves as gold – as such a figure of just 2% is really quite a modest expectation – ultimately it will be a question of price and expectations of price change that would determine the rate of uptake in the short term.

And the more favorable view of gold by banking authorities is not limited to BIS.

The FDIC issued a proposed rule on June 18, 2012, stating:

The federal bank regulatory agencies (the agencies) have jointly issued the attached Notice of Proposed Rulemaking (proposed rule) that would revise the measurement of risk-weighted assets by implementing changes made by the Basel Committee on Banking Supervision (BCBS) to international regulatory capital standards and by implementing aspects of the Dodd-Frank Act.

***

 

The following exposures would receive a zero percent risk weight under the proposal:

  • Cash;
  • Gold bullion;
  • Direct and unconditional claims on the U.S. government, its central bank, or a U.S. government agency;
  • Exposures unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency;
  • Claims on certain supranational entities (such as the International Monetary Fund) and certain multilateral development banking organizations
  • Claims on and exposures unconditionally guaranteed by sovereign entities that meet certain criteria (as discussed below).

***

 

The proposal allows banking organizations to recognize the risk mitigating benefits of financial collateral in risk-weighted assets, and defines financial collateral to include:

  • cash on deposit at the bank or third-party custodian;
  • gold;
  • investment grade long-term securities (excluding resecuritizations);
  • investment grade short-term instruments (excluding resecuritizations);
  • publicly-traded equity securities;
  • publicly-traded convertible bonds; and,
  • money market mutual fund shares; and other mutual fund shares if a price is quoted daily.

John Butler – Managing Director and Head of the Index Strategies Group at Deutsche Bank in London, Managing Director and Head of European Interest Rate Strategy at Lehman Brothers in London, and now head of  Amphora Commodities Alpha Fund – argues:

In what might be the most underreported financial story of the year, US banking regulators recently circulated a memorandum for comment, including proposed adjustments to current regulatory capital risk-weightings for various assets. For the first time, unencumbered gold bullion is to be classified as zero risk, in line with dollar cash, US Treasuries and other explicitly government-guaranteed assets. If implemented, this will be an important step in the re-monetisation of gold and, other factors equal, should be strongly supportive of the gold price, both outright and relative to that for government bonds, the primary beneficiaries of the most recent flight to safety. Stay tuned.

 

***

 

On 4th June the Federal Reserve, OCC (Office of the Comptroller of the Currency) and FDIC (Federal Deposit Insurance Corporation) collectively circulated a memo asking for comment on their proposed changes to the regulatory capital risk-weighting framework. Section 11, ‘Other Assets’, specifies that a “zero risk weight” is to be applied to “gold bullion held in the banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis…”.

 

Whoa. There you have it. As it stands now it would appear that, in the near future, banks will not have their regulatory capital ratios penalised for holding gold instead of government bonds as a safe-haven, zero-risk asset.

 

While the fundamental backdrop for gold is highly favourable and has been for some years, as the supply of money, credit and government bonds has grown dramatically, this technical aspect of the gold market is also clearly bullish. Indeed,  … if gold is re-classified as a zero-risk-weighted asset, “the price is likely to soar to a new, all-time high.” I stand by that statement. In about six months we will know whether I am right, or whether I have misread this one.

 

Given the potential importance for gold, I’m surprised that this announcement has not been widely reported in the financial press, alternative or even mainstream. Perhaps this is due to the fact that, at this point, the re-classification of gold has only been proposed, not implemented. The change is not due to take effect until 1st January 2013.

 

With interest rates near zero, however, the opportunity cost of sitting on a non-interest-bearing gold position for six months is close to zero. Yes, gold may appear to be in a downtrend and, yes, it might have been unusually volatile of late, but unless the regulators backtrack, I see this as clearly bullish for gold, enabling much catch-up to Treasuries.

 

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Wed, 06/27/2012 - 08:13 | 2564480 deerhunter
deerhunter's picture

zero risk all US treasuries mentioned above,  really????  On a long enough time line.....

Wed, 06/27/2012 - 07:19 | 2564398 tradewithdave
tradewithdave's picture

If it takes half as much gold for twice as much leverage, how is this bullish exactly? Outside of a FOFOA scenario of freehold....

www.tradewithdave.com

Wed, 06/27/2012 - 03:16 | 2564238 Bear
Bear's picture

Friday midday best time to buy gold. SCOTUS announces ObamaCare verdict on Thursday early. 70% think mandate is gone, if so a big (but short lived) lift in equities and a quick drop in gold, stays down all day and through night, opens lower and blows out lower by midday ... buy in low 1500's. If vote affirms OC all bets are off ... beware Thursday

Wed, 06/27/2012 - 04:29 | 2564284 HungrySeagull
HungrySeagull's picture

You are making a hell of a call.

My take is simply SCOTUS overturns everything, Gold will drop first (Paper shares) to cover selling dumps of medical and related crap...

Insurance related is gonna sink.

When the tusnami passes where are the herd gonna put the money?

Gold or Silver.

Either that or run back into the Treasury at any price including paying for the privileged.

If the Obama Care is upheld, we are lost. Unless somehow we can pull a rabbit out of the Elections in November.

Somebody is gonna leak something as they make their moves if anything comes out of the birdie in the court chamber cage.

Wed, 06/27/2012 - 02:21 | 2564166 OneTinSoldier66
OneTinSoldier66's picture

This is nothing new. I've been reading about this 'consideration' for weeks now. Personally...

 

I'm "considering" getting into Gold myself. Just considering it mind you. I might do it. One day, maybe. Perhaps.

 

My own Government talks about doing something about the deficit spending, some day. In order to get elected the current President said he would cut the deficit in half in his first term. I guess he was really only considering it, since he signed on the dotted line to double down on it rather than agree to only sign if there were real actual cuts. Oh well, I guess it figures since he doesn't really have to actually answer to the American people.

 

My own household? Well, we're consider dropping GAAP to figure out our budget after seeing how dropping mark-to-market worked out so great. Now if we could just figure out how to get zero percent interest rate loans and borrow and print to infinity, we'd be set!

 

Sincerely,

 

Jon Corzine

Wed, 06/27/2012 - 01:14 | 2564099 lolmao500
lolmao500's picture

 

The following exposures would receive a zero percent risk weight under the proposal:

  • Cash;

Cash a zero percent risk weight? Now that's hilarious!

Wed, 06/27/2012 - 00:42 | 2564052 jonjon831983
jonjon831983's picture

Didn't that Gartman guy come out and say he heard a rumour about this maybe 1/2 month ago?  He then retracted it quickly afterwards saying his source was wrong.

Wed, 06/27/2012 - 00:37 | 2564039 Clowns on Acid
Clowns on Acid's picture

Understood GW, howvever...will the Central banks continue to allow citizens to own it? Or will it be just another sleight of hand..."Ok...currencies now backed by gold...everybody relax"?

"Excuse me Mr Central banker, How much gold does your C. Bank own and how can I verify that"

CB response to private citizen - "STFU and go buy an IPad...or another house. The deleveraging is past".

Wed, 06/27/2012 - 00:07 | 2563983 GMadScientist
GMadScientist's picture

"allocated" sounds risky enough to me...maybe the BIS has never heard of the Corzine Effect.

Tue, 06/26/2012 - 23:35 | 2563893 jimmyjames
jimmyjames's picture

money market mutual fund shares; and other mutual fund shares if a price is quoted daily

*********

If the market opened limit down for a week-they would get their daily quote-but as far as zero risk- mmmf's is probably the highest risk vehicle out there-with constant low reward potential-

Tue, 06/26/2012 - 22:57 | 2563808 plata pura
plata pura's picture

the current ludicrous gsr will not stand

Thu, 06/28/2012 - 19:48 | 2571602 MeelionDollerBogus
MeelionDollerBogus's picture

I need to run a competing model (52-week ROC) but that 5-year pattern has break-ups. My now-to-end-of-year chart for gold:

2012 06 18 277week roc 02 goldpricemodel 2011 Jan to 2012 Dec 28

I'm pretty good at this. The gold vs silver price-mapping would be about the same as before. Initial equation is +0.11% for silver per $1 increase in gold, 2012 06 24 scatterplot gold vs silver 10yr 03 | goldpricemodel

Baseline is 1545=gold and that means for increases it's silver_rate to the power (gold price - 1545) and likewise for decreases this gives a negative power & a reduction % in silver price from its baseline on the trend of 27.56 (a factor where 1.00 = same value so 1 > factor > 0)

Tue, 06/26/2012 - 22:00 | 2563660 Bicycle Repairman
Bicycle Repairman's picture

This is your wake up call.

Tue, 06/26/2012 - 20:38 | 2563437 rycK
rycK's picture

This change in risk level thus allows banks to gather [or beg] less precious capital to satisfy reserve requirements. Thus the demand for gold should increase and the price should rise.

 

Since that is their best asset the propensity to sell gold will happen last in the order of things when the next banking crunch arrives.

 

This is just one more reason to buy gold. rycK

Tue, 06/26/2012 - 20:21 | 2563371 Joebloinvestor
Joebloinvestor's picture

This will be a real windfall for the US.

The US LIES about its' gold holdings.

It counts "in reserve" the un-mined gold on Federal land.

That is what it will issue paper against.

Thu, 06/28/2012 - 21:50 | 2571955 MeelionDollerBogus
MeelionDollerBogus's picture

UK, Germany, Italy, etc. ... how much non-US gold is on US soil? Looks like US gold to me with all those US guns pointing at anyone who will get near it to make a claim.

Tue, 06/26/2012 - 20:42 | 2563449 Bicycle Repairman
Bicycle Repairman's picture

If a real market in gold develops, we don't have one now, paper gold will sell at a discount to physical gold in the hand.  Then you can decide which to hold.  They may get different tax treatments, and I expect they will.

Thu, 06/28/2012 - 21:51 | 2571958 MeelionDollerBogus
MeelionDollerBogus's picture

Or... paper gold contracts will exist joined to the new spot price with highly restricted entry to the market & possible terrorism charges for unauthorized parties getting involved - just like for land-price bid-rigging where an honest but unwanted bid is met with jail & criminal charges.

Tue, 06/26/2012 - 19:24 | 2563250 anonnn
anonnn's picture

But, expect more clever-strkes of sociopathic [not for benefit of 99%] nature:

Beware "sighted deposits" re comingling, counterparty risks, etc, as Ive read from a Jesse's Cafe pdf recently [The Gold Bullion Market] :

..."A number of central banks, including the Bank for International Settlements, maintain gold accounts for other central banks. ...

 

... Of course, all central banks have the option to store their own gold, but given that it has to be shipped to a settlement centre if it is sold, gold so held is viewed as a sterile asset.

There are two types of gold account at the Central banks in the dealing centres:

1. Earmarked gold, where a central bank holds gold in custody for another central bank, separated from all other gold accounts, earmarked and identified as the property of another named central bank, and

2. Sight accounts, where a central bank has access to deposited gold, can use this gold for settlements independent of the depositor, with a promise to the depositor that gold will be made available to the amount deposited if so desired. "...

 

Tue, 06/26/2012 - 22:39 | 2563770 HungrySeagull
HungrySeagull's picture

O M F G.

The PEOPLE cannot BE THAT STUPID!

One ink signature on the correct paper in the Oval Office will essentially turn over that safe deposit or vault contents re: Gold and Silver to the Government.

Or maybe the bank resells the shit without Depositor knowing and raises the fees/Price and legalese to bury Private Pyle into buying back the shit.

It is the Bank's hope that Pyle will not be able to afford it at that time.

Thu, 06/28/2012 - 22:13 | 2572012 MeelionDollerBogus
MeelionDollerBogus's picture

Many people are stupid enough to believe gold isn't even money anymore. You mean that kind of stupid?

Tue, 06/26/2012 - 18:58 | 2563194 honestann
honestann's picture

This is such a joke!  I refer to the fact that they consider FIAT CASH to have 0% risk?  Have any of these morons read a history book?  Hahahahaha.

Tue, 06/26/2012 - 19:29 | 2563259 GOLDTEETHSILVER...
GOLDTEETHSILVERFILLINGS's picture

Follow the yellow brick road...

Tue, 06/26/2012 - 18:31 | 2563133 Count de Money
Count de Money's picture

Right. And according to Basel II, CMBS's were also Tier 1 assets and look how well that turned out.

Tue, 06/26/2012 - 18:28 | 2563129 Gringo Viejo
Gringo Viejo's picture

Just an aside. Silver closed @ 26.99 thereby making 27.00 calls worthless on ops exp day. I don't play options, nevertheless, these people are fucking criminals.

Thu, 06/28/2012 - 22:15 | 2572015 MeelionDollerBogus
MeelionDollerBogus's picture

Just as a better aside look at how many times silver has popped UP just before options expiry. Options aren't biased to the downside and for the last 10 years silver isn't either. It's volatile & rigged. LIVE with it. Play it for profit. Get an options Strangle so you make money either way. Write slv calls or puts if the Strangle exceeds the volatility you expect. Write just calls if you think it's heading down. Look at GLD & see the dollar-moves-per-time-unit are much bigger than SLV and try your hand at that. There's lots of room to profit up & down in paper on this then buy bullion with that paper.

Wed, 06/27/2012 - 00:30 | 2564026 Clowns on Acid
Clowns on Acid's picture

Not if one held a short Silver call...or a $27 digital put...or...well y'know what I mean.

Understand your observation however, maybe more retail long calls than short call plays. Please do the research and report back. Cheers.

Tue, 06/26/2012 - 18:22 | 2563114 apberusdisvet
apberusdisvet's picture

All this at a time when Russia and China (and other gold producers) are withholding all mine production from the free market, leaving perhaps only 50% of global gold production for the banksters and other sovereigns to fight over.  Not much will be left for the sheeple.

Tue, 06/26/2012 - 18:12 | 2563085 Bansters-in-my-...
Bansters-in-my- feces's picture

See...!

Golds not just a breakfast drink after all.

Tue, 06/26/2012 - 17:39 | 2562996 WilliamShatner
WilliamShatner's picture

If you haven't listened to this podcast you I encourage you to do so:

http://www.financialsense.com/node/8617

 

In it, Chris Martenson talks about how the central banks of the world may announce a global QE program out of the blue any day.  If you remember the now late Bob Chapman, he mentioned on many occasions that the central banks of the world could announce a unilateral currency devaluation.  IMO, this is the same thing as what Martenson is suggesting may happen, and this would likely put the price of gold much higher overnight.

Call me crazy....

Thu, 06/28/2012 - 22:16 | 2572018 MeelionDollerBogus
MeelionDollerBogus's picture

Ya... this is what Bob Chapman didn't mention ...

http://flic.kr/p/9YNPFE

Tue, 06/26/2012 - 23:12 | 2563824 All Risk No Reward
All Risk No Reward's picture

Folks, think this through.

 

 

1. The banksters own trillions in cash and hold trillions in debt through their private and corporate front holdings.

2. Hyperinflate.

3. ???

4. Profit.

Do tell, what could #3 be given that the banksters control the supply of money, they run your government, or at least will when they are done bombing your country into oblivion and they are doling out 3.6% 30 year mortgages.

Folsk, the end *is* hyperinflation, but what you need to clearly understand is that the banksters won't do that until AFTER they've taken all your physical chit - your house, your business, your farm, your streets, your power, your water, etc...  once they own almost everything, THEN they hyperinflate to balance their books.

The militarized police state roll out isn't happening now for no reason.

PS - credit is in a bubble and credit (debt) *is* money.  When credit money collapses, and it will, there will be much less money to buy food, let alone shiny stuff.

And no, it is impossible for people in FRN denominated debt (more than any other kind by a loooooong shot) to "lose confidence in the currency" without losing what you put up as collateral first (home, business, vehicle, farm, etc...).

Sure, foreigners not in FRN debt can...  but that doesn't mean Americans can - they can't.

Those FRNs are NOT backed by nothing, they are backed by YOUR BLOOD, SWEAT AND TEARS.

And the banksters think you are dumb and lazy, so they will enjoy Darwining your *ss if you don't get this right.

Thu, 06/28/2012 - 22:18 | 2572025 MeelionDollerBogus
MeelionDollerBogus's picture

Untrue. In the middle of hyperinflation some people will unload assets for paper and from that act the critical purchases will be made. The other weak hands for land, gold, silver and warehouses will be via controlled deflation, which no one will admit to. Scared of being stuck with inventory they'll just unload at firesale prices. You must be ready for both, young Jedi.

Tue, 06/26/2012 - 21:29 | 2563566 hootowl
hootowl's picture

OK, You're Crazy.  But I like your conclusion.  I am a longtime stacker of the white metal......have mucho.

Tue, 06/26/2012 - 18:29 | 2563132 moondog
moondog's picture

Crazy like a fox...

Tue, 06/26/2012 - 17:35 | 2562981 Sabremesh
Sabremesh's picture

How do we know that Banks won't be counting GLD certificates instead of physical? If the Comex pretends GLD and physical are the same, it seems pretty likely that banks will try to do the same.

Wed, 06/27/2012 - 06:55 | 2564379 negative rates
negative rates's picture

That was my thought exactly, what's the difference between not trusting a politician, and not trusting a banker? There is no difference, Pull the plug on this grenade and toss it back the bis or the basil committee. I'd be sawing bars in half to verifiy that agreement.

Tue, 06/26/2012 - 20:39 | 2563439 Bicycle Repairman
Bicycle Repairman's picture

That could happen, but it's still movement in the right direction.  Anyone holding GLD will have to face the question of counter-party risk.  Any risk officer worth his salt in the insurance industry thinks about counter-party risk constantly.

Tue, 06/26/2012 - 17:19 | 2562924 Vet4RonPaul
Vet4RonPaul's picture

The FDIC proposal also includes language to include other precious metals.  i'm stacking silver to ride gold's coat tails.  Did I mention that Bernake, Romney and Obama are neocon warmongering chickenhawk bankster mules?

Tue, 06/26/2012 - 18:09 | 2563078 paint it red ca...
paint it red call it hell's picture

back off buddy, what did a mule ever do to you???????????????????

Tue, 06/26/2012 - 17:21 | 2562932 HungrySeagull
HungrySeagull's picture

I rather that they leave the goddamn silver alone. It is one of the last frontiers of stacking without any shit attached.

Thu, 06/28/2012 - 22:19 | 2572031 MeelionDollerBogus
MeelionDollerBogus's picture

There's a giant VAT tax on silver in the UK. Just imagine if you had to pay 50% tax to buy silver bullion but not paper. Go on, just tell me they don't have the power to do that. Please try.

Tue, 06/26/2012 - 17:40 | 2562999 akak
akak's picture

Damn banksters, always trying to see what they can blob-up next!

Make me laugh!

Tue, 06/26/2012 - 18:34 | 2563147 moondog
moondog's picture

That is the eternal nature of Banker citizens from Bankmerica. Bankmericans think they center of universe which manifests itself in Bankmerican citizenism.

Tue, 06/26/2012 - 19:30 | 2563263 akak
akak's picture

The more Bankmerican citizenism is progressing, the more society is falling apart because human societies are hold togetherby culture.

Bankmerican citizenism, very efficient destroyer of culture and therefore society at the expense of the capacity of developing culture and holding together a society.

****************************************

That is how bullies explain themselves. Bullies can not be aggressors. And Bankmerican citizens are bullies through their eternal Bankmerican citizen nature.

****************************************

But in the end, even Bankmerican citizenism does not compare to a monoextrememum illegal system based of the unicity of law.

Tue, 06/26/2012 - 21:33 | 2563582 hootowl
hootowl's picture

UUUUUUUhhhhhh, What?

Tue, 06/26/2012 - 22:50 | 2563795 moondog
moondog's picture

There is a a Chinese government troll called AnAnonymous. He spends his time railing against "American citizenism". We are commenting in the AnAnonymous style...

Tue, 06/26/2012 - 23:45 | 2563906 akak
akak's picture

AnAnonymous style: offuscation, throating the idea, wording the mind, and blobbing-up the conversation. 
Oh, and can't forget monolizing of the speeching means.

All this, and much more, wrapped in the stinking roadside turd that is Chinese Citizenism.  Such is his eternal nature.

Make me laugh!

Tue, 06/26/2012 - 23:59 | 2563971 TheFourthStooge-ing
TheFourthStooge-ing's picture

Offuscation phenomenum is a large part of the insanitation property firmly Dangdang.

US citizen Henry VIII, the same US citizen king that conquered Easter Island, knew this, because Bahrain is well known Chinese citizenism nation.

Do NOT follow this link or you will be banned from the site!