Basel III Comes into Effect Today – What does it mean for gold?

Posted | 29/03/2019 / Views | 3310
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One of the key reforms that came out of the GFC was that of the Bank for International Settlements’ (BIS) implementation of the Basel rules.  Basel principally sought to decrease the risk of banks taking excessive investment speculation with little real liquid assets behind them.  The effect of that behaviour clearly played out in the GFC.  The banks were horribly undercapitalised and tax payers had to bail them out through Government funded bailouts.   We have had a gradual increase in the capital requirements and rules through Basel I, Basel II and as of today, Basel III comes officially into effect albeit some countries have adopted it ahead of time.

To date there have been three Tiers of asset classes with increasing liquidity ratios as you go up.  To date gold has been classed as a Tier 3 asset with a 50% risk weighting meaning only half its value counted toward its perceived solvency.  Under Basel III, Tier 3 is abolished and gold moves to Tier 1, allowing it to be 100% valued, or essentially risk free.

Many analysts believe this represents a huge impetus for increased gold prices for reasons beyond the obvious implications of increased demand.  Indeed some are pointing to the record gold buying by central banks last year as possibly part of them getting in early.  Others believe the suppressed price of gold since 2013 has been directly orchestrated by banks to allow them to load up in preparation at lower prices.  Last night saw a $20/oz drop in gold, breaking the resistance line of $1300.  That of course will add fuel to the fire of such speculation.  Frankly, none of we mere mortals could know what’s going on at these levels.

What we can all easily see from Basel III is reconfirmation at the highest level that gold is real money, a hard asset with no counterparty risk, a safe haven against financial crises.

From Palisade Research:

“Alan Greenspan commented in 2015 on a Council on Foreign Relations panel that we must understand that “sometimes gold trades like a commodity and sometimes it trades like a currency.”

During the last gold bull market between 2001 and 2011, it behaved very much like a commodity and was highly correlated to that commodity bull market as it rose from $350/oz to $1,900/oz. . .

The 1970s saw horrific inflation, peaking at 14%, before Paul Volcker – then chairman of the Federal Reserve – finally put the brakes on it by raising interest rates to shocking levels. Gold behaved very much like a currency then and reacted to the inflation as gold tends to do.

It was monetary policy that allowed gold to float from $35/oz in 1971 to its remarkable highs above $800/oz before settling down to the $350/oz range.

But the most glaring change in the gold price, as a direct result of monetary policy, was the 70% reduction in the purchasing power of the US dollar against gold – set in 1934.

In a startling move, gold was re-priced overnight from $20.67 to $35.00. This was an outrageous policy decision demonstrating gold’s historic role as a currency benchmark.”

And so, as we see a world sending signal after signal of a coming recession amid overwhelming debt, Basel III, whilst not necessarily the silver bullet some are waiting for, most certainly signals gold’s resurgence as a currency, and more precisely as real money, as it has throughout history.