Will Gold be a Part of Basel Capital Standard Regulations?

At the Mineweb.com, Ross Norman CEO of Sharps Pixley thinks that chances are getting better for gold to take a role in the banking system’s capital standard regulations.

Mr. Norman writes,

Banking capital adequacy ratios, once the domain of banking specialists are set to become centre stage for the gold market as well as the wider economy. In response to the global banking crisis the rules are to be tightened in terms of the assets that banks must hold and this is potentially going to very much favour gold. The Basel Committee for Bank Supervision (or BCBS) as part of the BIS are arguably the highest authority in banking supervision and it is their role to define capital requirements through the forthcoming Basel III rules.

In short, they are meeting to consider making gold a Tier 1 asset for commercial banks with 100% weighting rather than a Tier 3 asset with just a 50% risk weighting as it does today. At the same time they are set to increase the amount of capital banks must set aside as well. A double win potentially.

Hitherto banks have been much dis-incentivised to hold gold while being encouraged to hold arguably riskier assets such as equity capital, currencies and debt instruments, none of which have fared too well in the crisis. With this potential change in capital adequacy requirements. bank purchases of gold would drive up its value relative to other high quality qualifying assets, increasing its desirability for regulatory purposes further. This should result in gold being re-priced to bring it on a par with all other high quality assets.

While this should be good news, gold isn’t structurally compatible with the current form of political institutions (welfare-warfare state-central banking and privileged bankers) highly dependent on inflationism.

Since the Basel standards have in itself been fundamentally flawed, like in the past, governments and their adherents will only use gold as scapegoat for any future crisis. But who knows.

Nevertheless, the above serves as added indications where gold will likely play a greater role in the global economy, perhaps as money.