We are all aware banks around the world are coming under immense pressure from regulators and depositors, as our trust in banks has simply eroded since the financial crisis hit in 2008.
In an attempt to prevent further meltdowns, regulators have demanded that banks hold four percent of Tier 1 capital to back their assets. Tier 1 capital consists of AAA-rated assets only, as defined by regulators and rating agencies.
Since regulators want banks to hold the highest quality assets in this Tier 1 category, any nation that is rated AAA would be included.
Unfortunately, due to the global financial crisis, fewer and fewer countries have maintained their AAA status, which means that banks have had fewer securities to choose from to back their assets.
To compound matters, beginning in 2013, commercial banks around the world will need to hold six percent Tier 1 capital, up from the current four percent.
Right now, an arm of the Bank of International Settlements is discussing whether gold bullion should be included as part of Tier 1 capital (source: Mineweb, May 29, 2012).
The Bank of International Settlements (BIS) is an institution created by the central banks around the world. The BIS essentially is a bank for all of the world’s central banks, the aim of which is to foster financial and monetary stability globally.
Gold bullion should be considered part of the highest quality assets in the world, but soon, this may be the case for commercial banks. Gold bullion has no credit risk and no counterpart risk.
Should gold bullion be moved to Tier 1 status, gold prices would rise significantly, as many commercial banks around the world would diversify their paper assets with gold bullion, because it meets their Tier 1 capital requirements.
As I’ve been writing in these pages, with central banks around the world continuing to accumulate gold bullion, if commercial banks around the world suddenly join them, this will increase gold bullion demand significantly, leading to higher gold prices.
Dear reader, even the fact that the BIS is considering making gold bullion a Tier 1 asset confirms that gold bullion is a currency and should be considered as one of the safest and most secure assets in the world.
I would argue that gold bullion supersedes any of the Tier 1 type paper assets. So, despite all of the talk of gold bullion having no function and gold prices set to crash, this is further proof that gold bullion is a currency. In fact, gold bullion could be the best Tier 1 asset an investor could buy in these unprecedented troubled times. (Also see: Why I Bought More Gold-related Investments Yesterday.)
Where the Market Stands; Where it’s Headed:
“Wall Street suffered its bloodiest day of the year as U.S stocks sank more than 2% following an ugly jobs report,” flashed the headline in a CNN Breaking News Alert late Friday afternoon.
What did you expect? Was it not just a matter of time before reality hit?
Europe is the biggest economy in the world, surpassing the gross domestic product (GDP) of the U.S. I started writing in early January of this year that many eurozone countries would enter a recession (I was right on the money) and the U.S. could not escape the lethal combination of Europe’s recession and China’s economic growth drastically slowing.
More pain for stocks. The bear market rally that started in March of 2009 could soon be a memory. Get ready for more government spending; more monetary stimulus from the Federal Reserve, in what will be another botched effort to stem the bear market in stocks and the faltering economy.
What He Said:
“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.