Gold to Be Reclassified in the U.S.

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.

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.