Even the Dumfellians...
....are being forced to recognize gold is currency (again). Poor Keynesians Dumfellians. So as we continue to wait for the GRR technical report, might as well take the next couple of months to share vital points of view on both the macro and the micro. Here's a comment on how once again "Gold is Money (again)"....
On June 18, the Federal Reserve and FDIC circulated a letter to banks that proposes to harmonize US regulatory capital rules with Basel III.
BASEL III is an accord that tells a bank how much capital it must hold to safeguard its solvency and overall economic stability.
It’s a global standard on bank capital adequacy, stress testing, and market liquidity risk.
Here’s the important bit:
At the top of the proposed changes is the new list of “zero-percent risk weighted items,” which now includes “gold bullion,” right after “cash.”
That’s the part to take notice of.
If the proposals are approved by regulators — and that seems likely since adoption of Basel III will be — then this is a momentous change for the gold market.
Now banks will be allowed to hold bullion in their vaults and count it among their Tier 1 assets — in other words, the least risky assets.
That by itself would be bullish for the gold price, as banks that recognize gold’s unique characteristics seek to stockpile more of it.
But that’s not the whole story...
Gold Regains Money Status
For one thing, Basel III also stipulates that a bank’s Tier 1 holdings must rise from 4% of assets to 6%.
That means that banks may not only replace a portion of their existing paper with bullion, but may use it to meet some of the extra 2% as well.
In addition, this vote of confidence from the highest monetary authorities gives further impetus to the remonetization of gold.
In essence, what’s happening is that from now on gold will be considered “money” in virtually the same way as cash or bonds.
And banks will be given the choice between holding more of their core assets in history’s most reliable store of value vs. paper backed by nothing more than the promises of increasingly wasteful governments.