The man who accurately claimed that “this is the decade for silver” has now asserted that there is some hope for the banking crisis: gold. But it all depends on this one entity.
If you haven’t heard of the Basel Committee on Banking Supervision, chances are it’s because they try to work in secret to the best of their abilities.
Basel is a rather mysterious entity and very exclusive, but it serves a crucial role in Western society. It issues banking guidelines for the world’s largest and most esteemed financial institutions. They’ve been working around the clock devising new international regulatory rules that would minimize the risk for another disastrous financial meltdown in the aftermath of the 2008 financial crisis.
Eric Sprott and David Baker elaborate:
The Committee’s latest ‘framework’, as they call it, is referred to as “Basel III”, and involves tougher capital rules that will force all banks to more than triple the amount of core capital they hold from 2% to 7% in order to avoid future taxpayer bailouts. It doesn’t sound like much of an increase, and according to the Basel group’s own survey, the 100 largest global banks will only require approximately €370 billion in additional reserves to comply with the new regulations by 2019.1 Given that the Spanish banks alone are believed to need well over €100 billion today simply to keep their capital ratios in check, it is hard to believe €370 billion will be enough protect the world’s “too-big-to-fail” banks from future crises, but it is indeed a step in the right direction.
One of the most important facets of Basel III is that it will treat gold as an asset class. Many experts believe Basel III may officially label gold as a “Tier 1” asset in addition to cash and AAA-government securities.
Banks will have increased incentive to choose gold vs. cash or bonds if gold is granted “a favorable liquidity profile under its proposed Basel III framework.” Why would they choose otherwise when gold continues to outperform the U.S. dollar and bonds?
Other banks across the globe – non-Western banks – have already adopted this philosophy in regards to their foreign exchange reserves, vulnerable to erosion from ‘Central Planning’ printing programs, according to Sprott and Baker.
Turkey and China are two countries that have been encouraging their citizens to own physical gold. Turkey is doing it to increase the country’s savings rate “and propel loan growth.” Throughout the year, analysts have speculated that China is preparing for a gold standard. When one studies the ever-increasing levels of gold imports into their country, it’s hard to believe otherwise…
In the midst of all this, Basel III would add a new layer of regulation concerning relative liquidity of the bank’s assets and liabilities. This change is reflected in Sprott and Baker’s chart below:
However, the Basel Committee and the FDIC remain elusive. Other than a research paper from April and one conference call on behalf of Eric Sprott, the groups have kept silent regarding gold’s liquidity. Still, that paper and phone call suggested that gold will be give a 15% liquidity cut, although that has not been officially confirmed from Basel or the FDIC.
We’ll simply have to wait and see if the fragile fate of our financial system can be saved with the precious yellow metal.
Wealthwire – Friday, November 30th, 2012