Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Gold to Be Reclassified in the U.S.

Thursday, June 28th, 2012
By for Profit Confidential

Gold to Be ReclassifiedI recently wrote in these pages about the Bank of International Settlements (BIS) proposing to reclassify gold bullion as the safest and the highest quality of asset for central banks and all other banks around the world: Tier 1 capital.

Regardless of how the central banks wish to classify gold bullion, it is the market that will eventually decide the value of gold bullion, which has retained its value and played a significant role as a monetary asset for 5,000 years.

The central bank in the U.S.—the Federal Reserve—has recently released a memo to possibly change the status of gold bullion in this country. (Source: Federal Deposit Insurance Corporation, June 18, 2012.)

Currently in the U.S. and in many parts of the world, gold bullion is classified as a risk asset on which banks are allowed a 50% weighting. This means that for every $1.00 of gold bullion held, $0.50 worth is recognized as value on the books of the banks or central banks. The whole $1.00 is not recognized, because there is a risk, according to the classification, that gold bullion could lose its value rapidly.

Again, these are classifications created by central banks and have no bearing on the true value that the market will place on gold bullion.

Still, it is significant that the U.S. is proposing to reclassify gold bullion as a zero-risk asset, as early as January 1, 2013. This means that gold bullion will join the very short list of assets considered zero-risk by the Federal Reserve: U.S. Treasuries; the U.S. dollar; and assets and/or claims with the International Monetary Fund.

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So the central bank of the U.S. has joined the BIS in raising the status of gold bullion. Should the reclassifications indeed be instituted in 2013, it should increase demand for gold bullion by the banks here in the U.S., as gold bullion would be worth dollar-for-dollar on the balance sheet what a particular bank paid for it.

Furthermore, there is new legislation for banks around the world with Basel III. Basel III requires banks to increase their holdings of Tier 1 capital. If gold bullion is reclassified as Tier 1, then the banks can now use gold bullion as a diversification from other assets on their balance sheets.

Central banks around the world are taking steps to reclassify gold bullion to the status that is has held for 5,000 years: money. The proposed and very significant change by the Federal Reserve here in the U.S. should increase the demand for gold bullion and subsequently the price for the yellow metal. (Also see: “Japanese Pension Fund Buys Gold as Currency.”)

Michael’s Personal Notes:

In the first quarter of 2012, companies in the S&P 500 stock market index saw their earnings grow just 6.2%. Now that growth is threatening to go negative for the first time since the third quarter of 2009!

More S&P 500 companies are coming in with earnings warnings than in the first quarter of this year, while very few S&P 500 companies are raising their earnings reports’ outlooks. (See: “Many Public Companies Predicting Soft Earnings for the Balance of 2012.”)

FedEx Corporation (NYSE/FDX) is considered a barometer for the health of the world economy because of the volume of packages it delivers worldwide. FedEx, in its most recent earnings report, noted that it will introduce cost savings measures, as its business will contract going forward due to the recession in Europe, a slowdown in Asia, and very slow economic growth here in the U.S. This S&P 500 company is not expanding its business to meet demand; it is cost-cutting as a reaction to the global economic slowdown.

For the second time in less than two months, the world’s biggest consumer goods maker, The Proctor & Gamble Company (NYSE/PG) cut its earnings forecast for the same reason as FedEx. These S&P 500 companies are flashing red warning signals about the global economic slowdown.

Bed Bath & Beyond Inc. (NASDAQ/BBBY) admitted it had to use deep discounts in the U.S. to get consumers to spend in the first quarter. Its outlook for the remainder of the year has been cut dramatically, as the U.S. consumer continues to be very challenged financially, according to this S&P 500 company.

Regardless of which industry is issuing the earnings report, there is a slowdown right across the board, which is threatening to make earnings negative this current quarter in the S&P 500.

Even in technology, Taiwanese firm Copal Electronics is warning through its earnings report about the second half of 2012. Copal is the second-largest maker of laptop computers, which it sells to customers like Hewlett-Packard Company (NYSE/HPQ) and Dell Inc. (NASDAQ/DELL), along with other S&P 500 companies. This translates into weak consumer spending in the U.S., Europe, and Asia.

In three short quarters, dear reader, the S&P 500 has gone from double-digit earnings growth to single-digit earnings growth, and now to possibly negative earnings growth. The global economic slowdown is gathering steam at a very rapid rate and could be leading us into a global economic recession.

However, these earnings reports being issued by public companies illustrate that the U.S. stock market and the S&P 500 companies have more downside to them.

Where the Market Stands; Where it’s Headed:

The situation in Europe continues to deteriorate. China’s economy is slowing. Corporate profits in American have gone from double-digit growth (2010 and 2011), to single-digit growth (first quarter of 2012), to possibly flat for the remainder of the year. And the brave stock market refuses to collapse. But it will, my dear reader, it will. It is only a matter of time before the bear market rally that started in March of 2009 becomes a distant memory.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in Profit Confidential, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.

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  • Bill Jameson

    Brian: What you have said above is NOT a reference to gold in any way. Nor, is it a reference to an economic collapse alone. Instead, it is a reference to the judgement of mankind after the rapture of believers. Granted, there may very well be an economic collapse, but that was NOT the point of this Scripture.

  • Mark A Goldman

    St Michael is exactly right about Fred & Walter, The Federal Reserve is no more "Federal" then Federal Express. The Federal Express was enacted in 1913 with the Federal Reserve Act by world class banksters to centralize banking in the US with a fiat currency to replace the real wealth of precious metals.
    Most people do not even realize that they are illegally being taxed by our government to pay interest to the Federal Reserve on this fiat monopoly money for them to print and regulate, while they have stolen the true wealth. Watch the late Aaron Russo's documentary "America: Freedom to Fascism" on Youtube and you'll learn the truth of the Federal Reserve!
    This is the same bunch of world class banksters in the IMF that have basically centralized most of the world now. These evil lunatics have been slowly, steadily, and have now gained control over the worlds resources, own the media outlets(mind control), and most of the governments around the world and are hell bent on the total destruction of civilization as we know it.
    NATO, which is the strong arm of these mad men, go around the globe, bullying governments and their citizens into submission. Before 9/11, there were at least 12 countries that were IMF free. Now, under the guise of "War on Terror" there are three, with Iran is in their sights at this moment.
    In this country right now, we have a fake, unconstitutional president and a bunch of non-representing representatives, whom have sold out to these elites. With their unconstitutional laws, like the Patriot Act and NDAA (which suspends Habeas Corpus and makes America the "Battlefield"), they have set themselves up to take over America. Obama is to sign the UN's small arms treaty on July 27th of this year, which will allow UN troops to come confiscate and, if need be, kill US citizens. You people better start looking at alternative news sources and wake up or it is END GAME!

  • Mark A Goldman

    Correction: The Federal Reserve and not the Federal Express was enacted in 1913 with the Federal Reserve Act by world class banksters to centralize banking in the US with a fiat currency to replace the real wealth of precious metals.

  • Oxa

    us dollar is a world reesvre currency and by fed lowering rates, makes the dollar worth less and foreigners are less inclined to invest. also due to the fracntional reesvre system we just increase the money supply. we also have a huge deficit and are an import nation, we have huge overseas spending that is wasteful, baby boomers are retiring. housing is just following demand/supply. with hyperdeflation you would expect the dollar to rise, correct?

  • Cal Fuqua

    It's almost funny to see the lemmings head to gold.
    You can't eat it, you can't pay for a hotel with it, It is nowhere near as liquid as a dollar bill. Can you see a McDonald's clerk weighing out your gold powder for your meal? Gold sits in your bank vault and doesn't earn a cent in interest.

    As a purchaser of gold you are simply bullish on inflation.

    If you think banks have frozen liquidity now – just wait and see what happens when their stores of bullion fluctuate by 30% or more. Think they are going to ""unstick" frozen markets by selling gold at a loss? Ha! They'll come screaming to Uncle Sam, "the sky is falling…"
    Bad idea for all of us.

  • vee campbell

    So, Obama is the bad guy and Romney the good guy, I don't trust either anymore,but Romney the least. He does not deserve to be President, keeping all his money in offshore accounts, isn't this kind of traitor-ship what has cost America dearly. Come on!

  • Geof Barrington

    gold will be one of the few things that you will be able to eat . read some history of hyper-inflation . gold was good then and is good now

  • Geof Barrington

    george is a lot better off if you dont have any suppliesand reserves . dont worry about gearge . worry about yourself

  • elpadg

    I predict that something will happen. In the meantime other things will happen. We went through all this before. I remember back around 1980 or so silver went to around $50.00 and ounce and gold was relatively high, like maybe $850.00 to $1,000.00 per ounce and all kinds of rags had articles about how the economy was going to collapse and countries were going to fall (Saudi Arabia would not last 90 days), and Jesus was going to come riding in from the East on a cloud and rapture the believers out of their clothes and up into heaven to sit at the right hand of God. Guess what happened!?
    Now we have home PC's and the Internet and everyone, including me, has an opinion whether we know what we're talking about or not. And bad news travels like wildfire. So the prophets of doom look at an article about the Mayan calendar and that is why the world ended in December 2012. Also in the year 2000 we had the computer glitch, the Y2K. That was a terrible catastrophe just like they predicted. I think it caused about $15.00 damage and took 30 minutes to fix. And remember those comets and asteroids. But the one really disasterous occurrance, a few of you might recall, was when Elvis Presley wiggled his hips and the downfall of Western civilization became imminent.
    Now instead of a prediction about the end of civilization or the world once every few years, we are bombarded continually by every pessimist with a cellphone that knows how to upload content to the Internet. And bad news is more sensational than good news so we see a lot of it. Maybe we'll be faced with a self-fulfilling prophesy.
    I'm not sure what my point is anymore.
    However, I predict that we will each die in an elephant stampede unless we die of some other cause first.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles