Why gold is about to change from being a hedge metal to a bank-repairing élite currency
Some of you may have noticed that in the
last few weeks, Russia has started issuing gold ‘pieces’ that are legal
tender in the RF, and must be accepted at face value in all kinds of
payments without any restrictions. Other banks outside Russia are also
looking at ‘stamp sheet’ squares of gold grams that can be used in the
same way. Inside China, at the top of the financial system a measured
debate is well under way about how to create a global ‘super-currency’
backed by gold. The Chinese would favour this of course, because they
own more gold than almost anyone now. And although it would be a bind
for them (if it indirectly made the Yuan far more highly valued) in
terms of their export drive, as a trustworthy multinational
currency it would mark another move up for Beijing – bringing with it
massive financial services revenue as the hub for 21st century
deal-money transmission. In today’s bonkers world, there is more to
being a sovereign than physical exports alone.
But in an equally broad sense, gold is
shifting its investment positioning as fiat currencies issued by the
West begin to look increasingly prone to the inflationary pressures of
debt management. Not only that, but those banks we all love to hate are
having the same thoughts about how to stabilise their finances through
the medium of more flexible forms of gold.
Basel III (and Basel II) divide bank assets
into three risk categories (credit, market and liquidity risk) and
weight each risk depending on its attributes. Gold is now“zero percent
risk-weighted” in terms of credit risk. If the price of gold (POG) takes
off – as I believe it must before long – banks with lots of the shiny
metal would see a boost in capital – whereas the chance of getting a
capital boost holding the assortment of faux, central-bank-inflated,
“higher-rated,” no-return sovereign bonds is nearly zero.
Expert Eric Sprott explains that ‘If the
Basel Committee decides to grant gold a favourable liquidity profile
under its proposed Basel III framework, it will open the door for gold
to compete with cash and government bonds on bank balance sheets’.
Bear with me, I am going somewhere with this.
If you make gold more of a
tradeable/spendable ‘money’ than it is now, the metal moves from being a
lump of unwieldy ingot to being liquid cash. You don’t have to be a
brain surgeon to work out how quickly this would make light of the
liquidity/confidence problem the world’s banks face. It would do so only
in the eyes of mad accountants and sociopathic bankers, but that’s not
the main point at issue here: Erdogan’s Turkey has already demanded an
increase in the proportion of gold held by its commercial banks as part
of its reserves. China’s central bank has openly called for gold to be a
part of a basket of assets used to support a new super-currency.
Several things stem from this:
1. Alongside distrust of fiat Western currencies, gold’s demand factor must
rise enormously – given the increasing calls for gold backed debt
products, gold as a backing for currencies, gold as something to hold
which retains (at least) its value, gold as a way to repair bank balance
sheets, gold as adornment in an increasingly affluent India, and gold
as a payment method in its own right….taking share from cash and credit
cards in a world replete with uncertainty.
2. Although somewhat stationary as shares to
hold in recent times, gold mining stocks must now be seen as on the
verge of a major growth spurt.
3. As the redefinition of gold on the
surface solves so many problems for the banks, they in turn will press
for maximum access to it. Because almost all developed governments are
incapable of resisting bank-sector lobbying pressure today, as I have
suggested on many occasions in the past, the desire of sovereigns to
stop their citizens holding and trading in gold will become all
consuming over the next three years. Therefore, the window of
opportunity for those wishing to benefit from investing in it remains
finite.
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