Banks count gold as money again?

J. Keith Johnson Senior Writer, The Gold Informant
Font Size:

In 1971, for the first time in history, every major currency in the world became fiat. With the signature of President Nixon, the gold-backed dollar became the greenback, forever backed by the promises of the Federal Reserve and U.S. Treasury. Initial reactions were negative, sending the dollar downward. However, after the realization that all major world currencies were backed by dollars (largely because of its tie to gold), came the realization that it was in everyone’s best interest for the dollar to retain its perceived value. In just a few weeks the dollar returned to previous levels. Of course, since that time it’s been a continuous downward spiral, with the dollar losing near 80% of its value.

Since then, it’s seemed as though there’s been some sort of war against gold’s historical monetary status. Let’s face it, if you can’t print it then you can’t control it — at least not nearly as efficiently. With the growing dominance of central banks, a fiat currency is the only sure way to make sure they can control the wealth and prosperity. And, of course, there’s something wealth-building about being able to print currency for people at will and charge them interest. I know I’d love to be able to print promissory notes on my HP printer and be able to loan them out and charge interest at the same time.

With many central banks losing collateral through decreasing asset and currency values, they’re finding that meeting minimum reserve limits can be challenging. When banks begin feeling a wall behind them, they have a tendency to look for the most convenient way to change some rules to their benefit. In this case, a cursory glance around reveals a nice asset, already in their coffers, that’s been rising in value regularly for the last decade — gold.

CME Clearing Europe announced last week that they have “extended the range of eligible collateral types to include gold bullion.” The press released continued:

The extension offers additional flexibility at a time when high quality collateral is at a premium and the clearing of over-the-counter (OTC) derivatives is increasing. CME Clearing Europe has followed the lead of CME Clearing, which has accepted gold to cover margin requirements since October 2009.

Basel III increased gold’s status to Tier 1, meaning that it now enjoys 100% weighting rather than the 50% that came with its prior Tier 3 holding status, which was eliminated. But it also increased minimum Tier 1 holdings from 4% to 6%. This, in effect, puts gold on equal footing with any reserve currency or bond.

Doug Hornig shares some interesting thoughts:

On June 18, the Federal Reserve and FDIC circulated a letter to banks that proposes to harmonize US regulatory capital rules with Basel III.

BASEL III is an accord that tells a bank how much capital it must hold to safeguard its solvency and overall economic stability.

This past quarter saw a dramatic increase in central banks’ accumulation of gold, with annual estimates expected to approach 500 tonnes, according to the World Gold Council. In fact, if it weren’t for banks, second quarter demand for gold would have decreased dramatically. Perhaps this has something to do with gold’s increase this week? We wouldn’t count on it. But this does point to future increase in demand and, more than likely, higher prices to come.

J. Keith Johnson’s Austrian and libertarian perspectives on current socioeconomic and geopolitical affairs are fueled by his insatiable desire to both discover and share the truth. A Goldco Direct affiliate, you’ll find his commentary on The Gold Informant website, as well as various Internet financial and news sites.