While Banks Crumble, The Next Leg Up For Gold Prices Draws Near

By Peter Krauth, Global Resources Specialist, Money Morning

Something's afoot in the world of high stakes finance.


The Basel Committee for Bank Supervision (BCBS) is about to decide something crucial to bankers, sovereign nations, and gold investors alike.


As part of the Bank of International Settlements (BIS), the BCBS is reviewing the upcoming new Basel III rules. That may sound arcane to you but I promise it's not.


Though rarely discussed in the mainstream press, the all-important Bank of International Settlements is essentially a global central bank to the world's central banks.


Its goal is ostensibly to provide global stability to the monetary and financial systems.


And in a surprise twist that only a few years ago would have been considered preposterous, the BCBS is entertaining whether gold should qualify as a full-fledged Tier 1 capital asset.


Currently, the precious metal is relinquished to a Tier 3 status, deserving no more than a 50% weighting at that.


Here's why that distinction is important and potentially astonishing.


Achieving Tier 1 status would credit gold with the recognition it's been denied ever since Nixon closed the gold window on August 15, 1971.

In essence, it would mark the official recognition that "gold is real money"!

But that's not the only reason gold is gaining respect. Other factors are brewing that will set the stage for the next leg up in gold prices.

As Banks Teeter, Gold Gains Respect

One of them is the crumbling state of world's banks. Once unwavering, the trust in these financial ivory towers is precarious at best.


In the last couple of months alone, Greek depositors have withdrawn billions of euros in deposits, as the fear of a "Grexit" looms large.


Not to be outdone, Spain banks have been emasculated by the Iberian nation's own bursting real estate bubble. After denying for weeks that a bailout would be required, officials finally caved to a "Spailout", giving Spain's banking system a 100 billion euro rescue package.


This phenomenon is not exclusive to the Eurozone either.

Around the world, banks are under intense pressure from depositors, regulators, and even tardy ratings agencies.


In fact, Moody's recently downgraded 15 of the world's largest global financial institutions including those "too big to fail" behemoths.


We're talking about Goldman Sachs, Citigroup, Morgan Stanley, Bank of America, Credit Suisse, and a host of other European and foreign banks. Some of them fell as far as three ratings notches.


While the shares of many of those same banks rallied briefly on the news, the longer-term impacts are likely to be ignored by a majority of investors, at their own peril.


These recent downgrades mean many affected banks will have to post higher collateral to their partners when trading derivatives.


Bob Young, managing director of North American banking for Moody's, said every one of the concerned U.S. banks was placed on negative watch, signifying they could be subject to further downgrades.


To stem the risk of future meltdowns, regulators are now requiring banks to keep no less than 4% of their capital in Tier 1 assets, which are exclusively AAA-rated holdings, according to ratings agencies and regulators alike.


There's that phrase again---Tier 1 assets. In the future that may mean more gold, depending on how the BSBC rules.


But there's a third part to this story. Increasingly, the ownership of physical gold remains "sticky".

The Ongoing Accumulation of Gold

Even when the price of gold endures a prolonged selloff as it has for several months, gold ETFs rarely see much of a decline in their total holdings.


In the past year or so, central banks across the globe have become net buyers of gold bullion, reversing a multi-decade trend.


Gold is also readily finding its way into a growing number of investment accounts as well.


According to Scott Powers, President and CEO of State Street Global Advisors (SSGA), the #2 money manager in the world with $ 2.3 trillion in assets under management, gold and "real assets" are an important component of client portfolios.


For discretionary accounts, SSGA recommends a 5% -15% weighting in hard assets, with gold representing a significant portion.


Surely, it doesn't hurt that SSGA are the sponsors of the SPDR Gold Shares (NYSE: GLD), the second-largest exchange-traded fund in the world.


When such a large money manager considers gold not only legitimate but essential and recommends significant exposure to its clients, that speaks volumes about the level of recognition gold has achieved.


Clearly gold has gained favour not only with the world's largest money managers, but even with central banks which are now accumulating the metal at a growing pace.


Right now it's the perfect storm of ongoing aftershocks of the 2008 financial meltdown and the unrelenting rise and strength in the price of gold that may help it regain the financial respect it deserves.


Today, it seems even the BIS and commercial banks, those relentless proponents of fiat money, could well be forced to admit what's becoming increasingly clear: gold is real money, free of both counterparty and credit risk.


An increase from 4% to 6% Tier 1 capital requirements, together with a favorable revision as a full-fledged Tier 1 asset, could combine to trigger the next massive upleg in the gold secular bull market.


Your resource guide,


Peter Krauth, Editor


Real Asset Returns


Further Reading...


Peter's service, Real Asset Returns, is about much more than gold. As Peter has noted, soon virtually every substance vital to modern life will become enormously expensive and profitable for investors who know how to play it. According to Peter, this situation "could spur the biggest investment gains in history." To check out his latest free report click here. 

About the Author
Peter Krauth is a former portfolio adviser and a 20-year veteran of the resource market - with special expertise in energy, metals, and mining stocks. Peter uses the connections he amassed over the years to exploit the moneymaking potential of every kind of commodity. As editor of Real Asset Returns, he travels around the world to dig up the latest and greatest profit opportunity. Peter has also contributed some of the most widely read and highly regarded investing articles on Money Morning. Learn more about Peter on Money Morning's contributors page.

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Physical gold and silver have been safe havens for 4,000 years!

As we sail into the uncharted waters of massive government debt around the world, one wonders how our children will deal with such debt as we are thrusting upon them by basically living beyond our means for most of the past 40 years. Our homes became our secondary bank, where you could dip into what seemed to be an ever increasing amount of home equity, every year to buy a new car, a boat, a vacation or whatever. No problem! Money was cheap and houses always increased in value. No more!

After a Trillion dollar meltdown in real estate, and trillions more squandered in a derivatives market which no one seems to understand, the major banks of the world stood on the brink in 2008, before governments came to the rescue. Now the question is, who will rescue the governments. Certainly not the insolvent banks who are still hiding Trillions of debt from the derivatives fiasco from their books and from share holders.

Governments, especially democratically elected ones, almost always take the path of least resistance when dealing with debt and deficits. It is, in most western democracies, political suicide to take a stand to say NO MORE, and begin austerity measures that might attempt to mitigate such huge debts. So, they push those debts down the road so to speak, and the road leads directly to our children and grand children, and it tremendously threatens their future well being, in every sense of the word.

In the U.S.A. for instance, the government is now showing a deficit of 15.4 Trillion dollars. This is, by any measure, a massive and mind numbing number, which will never truly be paid off. It is however, only a fraction of what the USA truly owes.  When the future promises of medicare, and old age security are calculated into the mix, the number reaches over 202 Trillion dollars. As a stack of $1 bills, that number would reach our moon and back again, several times over. It is truly staggering, and it cannot be paid, unless of course, our governments instigate rapid and possibly hyper inflation.  

At this writing, approximately 10,000 baby boomers will retire, every day, for the next 18 years!!!

With Europe on the brink of imploding, its currency soon to be an after thought, and the U.S. dollar (the usual go-to safe haven) building up to its own massive implosion, where could a lone investor turn for some sort of comfort!  Well, where people have turned for currency comfort for the past four thousand years. To gold and silver, that's where!

In 1964 one gallon of gas cost approximately 25c in U.S. currency. Today, that same 1964 quarter will buy you even more gas than it did then. There is only one reason and that is the silver content of that coin. That was the last year those coins contained 90% silver content. (today the melt value of that quarter is about $7) Over the next few years the content was reduced and eventually completely eliminated from coins.

 For the past ten years, gold has moved in lock step with U.S. Government debt.

Last year, the Chinese government began encouraging its citizens to add physical gold to their savings. For the past three years China has been buying more and more gold for its foreign currency reserves in lieu of American dollars (U.S. government debt, of which China still holds over $1 Trillion.)

You will hear great American investors like the venerable Warren Buffett chide that gold is a worthless investment that does nothing as you stand around guarding it. It is now a provable fact that, if Mr. Buffett could have sold all of his shares in Berkshire Hathaway stock in 2002 and just bought gold, he would now be 500% richer. How is that for holding value!!!

Today there are vested interests who will do whatever it takes to bring down the price of gold and silver, as their position in the financial world depends on it. Institutions like central banks and large banks such as J.P. Morgan, who have probably the largest silver short in history at present. Don't be fooled or afraid of these dealings. No one can hold back a river with a bucket brigade for very long. The flood is coming, bet on it!!

If you do not have physical gold and silver in your savings plan, then at least consider these thoughts. It may be the only way you will be able to leave value to your grand children as their generation is saddled with the most massive debt the world has ever witnessed.

HP

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