Will Basel-III Changing Gold’s Status as a Reserve Asset for Banks Change the Future?


 

The Bank of International Settlements under Basel-III changed the status of gold as a reserve asset effectively on April 1, 2019. Gold used to be viewed by the banks as a risky asset and classified under “Tier-3”, which meant it was considered risky and could only be carried on the books at 50% of the market value for reserve purposes.  Naturally, gold has historically been classified as a Tier 3 asset because its value fluctuated. To the extent that the value was reduced for reserve status by 50% ensured that there was little incentive for banks to retain gold as a reserve asset regardless of their beliefs.

Since the BIS reclassified gold as a “Tier-1” asset, its value is now no longer reduced but is reflected as 100%. Now people assume banks will run out and buy gold. The problem is that it is not a fixed price on the balance sheet but it is regarded only as a 100% of market value.  While some claim that this makes Gold a “riskless” asset in the eyes of world banking authorities, they fail to note it is market value. Cash does not fluctuate $1 is still $1 regardless of what it buys.

Banks are NOT in a mad rush to buy gold and shift their reserve asses when they cannot employ gold in the banking business. True, there was once upon a time when banks cherish gold reserves but that was when gold was fixed on a standard. It will by no means increase confidence in any bank or the system as a whole. Gold remains illiquid insofar as a reserve asset is concerned.

While there is no incentive for banks to load up on gold even if it is a Tier-I asset from a banking and economic standpoint since we are not on a gold standard and its value will fluctuate unlike cash reserves, There is another reason why a small portion would make sense to retain in gold outside of the United States especially in Europe. The reserve status that is Tier-I in Europe would be bonds of all member states of the EU. There is obviously a risk in that respect.

These standards, collectively called Basel III, compare a bank’s assets with its capital to determine if the bank could stand the test of a crisis. Capital is required by banks to absorb unexpected losses that arise during the normal course of the bank’s operations. The Basel III framework tightens the capital requirements by limiting the type of capital that a bank may include in its different capital tiers and structures.

Because not all assets have the same risk, the assets of a bank are weighted based on the credit risk and market risk that each asset presents. For example, take a government bond may be characterized as a “no-risk asset” and given a zero percent risk weighting. On the other hand, a subprime mortgage may be classified as a high-risk asset and weighted 65%. So Basel III considering government debt as “no-risk” is a little foolish when we look into the years ahead.

Gold will offer a neutral bank with respect to government debt holdings, but it will still not provide a stable base of an asset since it will fluctuate rather than the immediate currency base. Gold will offer a hedge against sovereign debt among European banks more so than America.

Interest Rate & Currency Pegs


QUESTION: Martin,

I went over three blogs this morning (both public and private); they are The FED Between a Rock & a Hard Place, Manipulating interest rates & Public vs Private Interest Rates. A common theme of the FED possibly pegging interest rates and inflation. My question is: If the FED is induced to peg rates at artificially low levels and the traditional method of combating inflation is raising rates, something must give, so are metals and commodities getting ready for “prime time?”

CF

ANSWER: Behind the curtain the system of pegging rates, as I have stated, is viewed substantially differently than QE. The rates on the U.S. debt will be pegged, but not the Fed funds rates. They will be able to raise rates to the marketplace, but the bonds will be “pegged” like the Swiss attempted to “peg” the franc/euro.

This is a hybrid interest rate system that would eventually collapse as all pegs do. But it will allow, initially, for a bifurcation of rates.

They REALLY REALLY REALLY REALLY REALLY do not want me to talk about this publicly.

This is feeding into what we see coming for the next wave. They realize QE has failed. They cannot allow rates to rise as it would blow out the budgets.

This is not a long-term solution. The interest rate peg collapsed in 1951 due to Korean War inflation

Public v Private Interest Rates & Sovereign Debt Crisis


QUESTION: Dear Martin I have a question for the blog. There has been forecasts for a sovereign debt crisis but recently you have discussed how various governments may manipulate govt bond interest rates down as has happened in Europe and Japan. If Europe and Japan are anything to go by then this could go on for some time. If govts are successful in this, does this mean that there may not be a sovereign debt crisis?

ANSWER: The Sovereign Debt Crisis involves crossing the line where the private sector no longer trusts government debt. We have begun to cross that lines in Europe and Japan where the central banks are buying the debt in bulk. There have even been German auctions of bonds where there was no big.

Yes, the central banks can artificially keep government interest rates low, but that is only possible when they are the buyers.

We are experiencing already interest rates rising in the peripheral governments where their central banks do not engage in QE – namely emerging markets. We will witness private rates rise for that is a free market. However, from the government side of the table, the Sovereign Debt Crisis among the developed countries engaging in QE has unfolded as NO BID. They can artificially keep rates low ONLY because the central banks buy the debt – nobody in the private sector would buy 10 years paper at 1% to 3% when they need 8% to break even in pension funds.

Also, pay attention to the state/provincial debt where they do not have the ability to buy their own nonsense. The manipulation of rates will be at the federal level, not in the state/provincial and municipal levels of government.

So, pay attention to the bifurcation in rates that is unfolding between PUBIC v PRIVATE.

 

The Fed is Between a Rock & a Hard Place


QUESTION: Dear Mr Armstrong,
Not sure if I am understanding it correctly. Is the FED currently between a rock and a hard place? The FED is not able to cut rates (implement QE) due to the current pending/ongoing crisis of the US pensions, and they cannot raise interest rates as it’s going to cause more USD liquidity stress. However, rates are still going to rise as they have lost control of the interest rates. May I know is it possible for them to change the rules and allow pension funds to invest in the equity markets like how the Japanese are doing it so that they can achieve the higher returns for the pensions as well as hoping to keep interest rates as low as possible? Then this will be part of the energy (funds) pushing US equity markets to all-time highs?

Appreciate the daily education.

Warmest Regards,
MC

ANSWER: The Fed realizes that QE has been a complete failure. What they are looking at is the 1942-1951 period when the Treasury ordered the Fed to create a peg and support the bond market at benchmark rates of interest thereby installing caps. This is slightly different than QE which buys in debt on a wholesale basis. The Fed may try the peg and this will result in a bifurcation of interest rates where private sector rates will rise and public rates will become fixed even on the 2 to 10-year paper. I believe they will come under pressure to try to prevent the national debts from exploding, which will introduce yet another crisis of inflation. By trying to peg the rates, when the market smells a rat, they will end up in a position of having to monetize the entire debt. We have some very interesting times ahead.

Gold & The Hedge Against Government


QUESTION: Hi Martin,

You have mentioned repeatedly that gold is a hedge against political uncertainty. For the past several years the price has hovered at the cost of production and exploration is virtually non-existent as capital has dried up.

Nevertheless, the world is a political mess as far as the eye can see. So, it seems odd that gold is not bid more aggressively.

Regards,

Eric

ANSWER: The only time gold has rallied significantly is when the CONFIDENCE in government declines. That was the case during the post-1976 era for people saw inflation as running away. That was because of OPEC creating STAGFLATION meaning it was cost-push inflation that eventually converted to demand-push inflation by mid-1979. I understand that all of these gold-bug analysts have been preaching hyperinflation for decades. The whole Quantitative Easing (QE) was supposed to create $10,000 gold years ago. Here, after 10 years of QE, gold remains trapped in a consolidation.

Gold will be the hedge against political uncertainty and government ONLY when the people reach that critical point of losing faith in government. We are at the 35% level where people believe the government is the number one problem. When that crosses the 45% mark, things will start to become different. This has nothing to do with the quantity of money. Most millennials use their phones to buy things or credit cards – not cash. The idea of gold as a store of value has faded between generations. The worst thing you could do is judge the world by what you believe. Everyone will act only on their own reasoning and belief system.

Calgary Vacancy Rate Still near Record Highs – Sorry, Calgary is closing


The environmentalists have really gutted Alberta which was an economy based upon commodities. With that industry under assault, the economy has been decline. According to the quarterly report released April 1st 2019, Calgary’s downtown vacancy rate is currently at 26.5%, the highest in Canada. Although it decreased slightly from its peak at 27.8% in the second quarter of 2018, it still exceeds the vacancy rate from the economic crisis in the 1980’s which stood at 22%. And although this has been in the 20% range for a few years now, it shows no sign of stopping soon.

With a loss in tax revenues from the downtown core, rising property taxes have shifted onto the shoulders of small businesses. Property taxes for small businesses have increased considerably from 2017 to 2018 and small  business owners were told the bill for 2019 will be even higher. Some businesses have had their property taxes increase by over 400% when they received their assessment, with the first substantial increase due July 1st 2019.

Alberta’s businesses have weathered numerous fiscal storms recently; the recession due to the fall in the price of oil and decreasing property values, the introduction of carbon tax on Jan 1, 2017 with a further increase on Jan 1, 2018 and the spike in minimum wage from $10.20 to $15.00 on Oct 1 2018, but the new property tax increase takes the cake and the already thin margins of struggling businesses will be wiped out completely. Many have reached out through social media and are connecting through a Facebook page called “Sorry, Calgary is closing.”

An emergency council meeting will be taking place Monday June 10th to try to patch things up but the council of Calgary won’t be the only ones there; a massive rally will be taking place before City Hall at 7:30am in protest. Petitions are also circulating as many are calling for the province to step in immediately and remove Calgary’s council members, including Mayor Nenshi himself.

What they don’t seem to realize, is if you raise taxes enough, there won’t be any incentive to work. People will instead be driven away and go where the prospects are more opportunistic for them. Like in Vancouver where the price of gas was at an all-record high last month ($1.789 per litre or $6.772 per gallon CAD) and many drove across the border to Washington State to fill up not only their vehicle, but multiple jerrycans as well. People will
always migrate away from where the prices and taxes are outrageous and Calgary is no different

How the Rich Make Their Money


 

QUESTION:

Good Sir,

When you say the ‘rich get rich by investments, not wages’ you fail to identify the following wealthy class.
CEO’s of corporations, ‘Hollywood’ movie stars, Sports athletes, Recording artists, etc.

Regards and continued success,

An avid follower

LB

ANSWER: There are always exceptions, but those who receive big bonuses or high wages such as sports and movie stars are a tiny fraction of what they call the “rich.” The “rich” are defined as households with income in excess of $250,000. The “rich” who have built wealth from creating businesses and investment are really 99% of that class. The movie stars and sports figures are paid salaries based upon their draw. Many others in Hollywood get base salaries and a percentage of the box office take. The CEOs get bonuses based upon performance.

The government takes Social Security and places restrictions whereby it can only invest in government bonds. This deprives the average person from making appreciable capital gains.

Behavioral Economics: Full Series


Published on Sep 11, 2017

Behavioral economics helps you understand dating, partying, college loans, voter ignorance, and all the choices humans make. Here’s our full series. SUBSCRIBE: http://bit.ly/2dUx6wg

 

Debate: Is There Too Much Inequality in America? | Learn Liberty


Published on Mar 8, 2013

Wealth inequality is real, but is it fair? The distribution of wealth in America is lopsided in the favor of the 1% – a point made by the video “Wealth Inequality in America.” This inequality is intuitively and philosophically unfair to many people, but what happens when we examine the roots of our motivation? How can society BEST help the poorest? How can individuals BEST provide better lives for themselves – and their loves ones? Can our BEST laws also be our FAIREST? A fair society is a challenge to the status quo. Learn Liberty asked two professors — a libertarian (Professor Steve Horwitz), and an opposing philosopher (Professor Jeffrey Reiman) — to answer questions about wealth, fairness, inequality, and the United States. This is their debate.

There’s No Such Thing As An Unregulated Market


Published on Nov 16, 2017

We all want the safety and dependable quality that “regulation” is supposed to provide. Government can provide it to some extent, but markets can do it better, if we let them. Howard Baetjer of Towson University explains.