ANALYSIS: the dramatic change in the status of Gold

Why gold is about to change from being a hedge metal to a bank-repairing élite currency


Some of you may have noticed that in the last few weeks, Russia has started issuing gold ‘pieces’ that are legal tender in the RF, and must be accepted at face value in all kinds of payments without any restrictions. Other banks outside Russia are also looking at ‘stamp sheet’ squares of gold grams that can be used in the same way. Inside China, at the top of the financial system a measured debate is well under way about how to create a global ‘super-currency’ backed by gold. The Chinese would favour this of course, because they own more gold than almost anyone now. And although it would be a bind for them (if it indirectly made the Yuan far more highly valued) in terms of their export drive, as a trustworthy multinational currency it would mark another move up for Beijing – bringing with it massive financial services revenue as the hub for 21st century deal-money transmission. In today’s bonkers world, there is more to being a sovereign than physical exports alone.

But in an equally broad sense, gold is shifting its investment positioning as fiat currencies issued by the West begin to look increasingly prone to the inflationary pressures of debt management. Not only that, but those banks we all love to hate are having the same thoughts about how to stabilise their finances through the medium of more flexible forms of gold.

Basel III (and Basel II) divide bank assets into three risk categories (credit,  market and liquidity risk) and weight each risk depending on its attributes. Gold is now“zero percent risk-weighted” in terms of credit risk. If the price of gold (POG) takes off – as I believe it must before long – banks with lots of the shiny metal would see a boost in capital – whereas the chance of getting a capital boost holding the assortment of faux, central-bank-inflated, “higher-rated,” no-return sovereign bonds is nearly zero.

Expert Eric Sprott explains that ‘If the Basel Committee decides to grant gold a favourable liquidity profile under its proposed Basel III framework, it will open the door for gold to compete with cash and government bonds on bank balance sheets’.

Bear with me, I am going somewhere with this.

If you make gold more of a tradeable/spendable ‘money’ than it is now, the metal moves from being a lump of unwieldy ingot to being liquid cash. You don’t have to be a brain surgeon to work out how quickly this would make light of the liquidity/confidence problem the world’s banks face. It would do so only in the eyes of mad accountants and sociopathic bankers, but that’s not the main point at issue here: Erdogan’s Turkey has already demanded an increase in the proportion of gold held by its commercial banks as part of its reserves. China’s central bank has openly called for gold to be a part of a basket of assets used to support a new super-currency.

Several things stem from this:

1. Alongside distrust of fiat Western currencies, gold’s demand factor must rise enormously – given the increasing calls for gold backed debt products, gold as a backing for currencies, gold as something to hold which retains (at least) its value, gold as a way to repair bank balance sheets, gold as adornment in an increasingly affluent India, and gold as a payment method in its own right….taking share from cash and credit cards in a world replete with uncertainty.

2. Although somewhat stationary as shares to hold in recent times, gold mining stocks must now be seen as on the verge of a major growth spurt.

3. As the redefinition of gold on the surface solves so many problems for the banks, they in turn will press for maximum access to it. Because almost all developed governments are incapable of resisting bank-sector lobbying pressure today, as I have suggested on many occasions in the past, the desire of sovereigns to stop their citizens holding and trading in gold will become all consuming over the next three years. Therefore, the window of opportunity for those wishing to benefit from investing in it remains finite.

Earlier at The Slog: Can Julia Gillard save the World?