Gold May Become a Tier One Asset

I received an email regarding gold officially being accepted as a tier 1 banking asset as of January 1st 2013.

Information indicates that the global banking regulatory group that meets in the small mountain town of Basel, Switzerland is responsible for setting global banking standards. They decide things like which assets qualify as Tier 1 assets, how much loan loss reserves banks need to hold, and how much leverage banks can take on.

Basel Committee on Banking Supervision

Officially known as the Basel Committee on Banking Supervision, it’s only met three times in the last 20 years. The first meeting was in 1988. The second meeting, Basel II, in 2004, was a disaster. The Basel banking geniuses allowed mortgage-backed securities to be considered a Tier 1 asset. (A Tier 1 rating means that the asset is considered a cash equivalent.) Of course, after the housing crash and ensuing Great Recession, we know that mortgage-backed securities are nowhere near as good as cash.

So in 2010, the committee met again to fix their past mistakes. It was at this meeting — known as Basel III — that the biggest news for gold in 40 years emerged.

Basel III will fundamentally change the way gold is valued by the financial markets.

The Basel Committee on Banking Supervision ruled that gold could be included as a Tier 1 asset. In other words, Basel III rules make gold just as good as cash or Treasury bonds.

Before Basel III, banks had to hold around 6% of the value of outstanding loans as collateral for those loans. Most of that 6% was comprised of what’s called Tier 1 assets: cash and company stock. (Treasury bonds count as cash.) After Basel III, banks are required to hold approximately 12% of Tier 1 capital. But the big news is that gold will now be considered a Tier 1 asset.

Prior to Basel III, a bank could only count 50% of gold’s market value as collateral. As of January 1, 2013, gold’s value will double as a banking asset.

Rumors have the European Union will adopt Basel III rules in January 2013. So will Russia and Japan. China, India, and even Pakistan are on board. Australia, New Zealand, Brazil, and South Africa, too.

ONE POINT is that gold that banks hold will double in qualifying asset value automatically. The banks will need to do nothing and gain 100% increase in their qualifying banking gold assets. This seems to be great for foreign banks, who many have been accumulating gold over the last several years and bad for most USA banks who mostly have not been accumulating gold.

SECOND POINT Will banks need or want to start buying more gold now or have they already made their major purchases of gold in anticipation of the effective date of January 1st 2013. Most likely, yes, (I would guess most if not all) major gold buying banks have long ago heard of this new Basel III gold reclassification asset upgrade rule to a tier 1 asset.

THIRD POINT The big question is, has the new Basel III banking rules requirement of 2010 named above been figured in to the price of gold? In my opinion most of the gold buying by banks has been completed in anticipation of the 2013 effective date.

The above information is opinion based except where noted. Always contact a licensed professional for information on the above subject or BEFORE applying or practicing the above information.

Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.