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

Email

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In the last couple of months alone, Greek depositors have withdrawn billions of euros in deposits, as the fear of a "Grexit" looms large.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

Join the conversation. Click here to jump to comments…

About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

Read full bio

  1. Henri | June 27, 2012

    Is it not by now that, according to the authors previous articles/teasers, silver should be on it's way to the moon and beyond?

    • Frank | June 28, 2012

      I don't recall them giving an exact date. No crystal ball. Just common sense. You go ahead and put your money in bonds.

    • Robert Stone | July 10, 2012

      The big banks have been manipulating the price of silver to keep it down until they can unload all the paper silver contracts they bought… and can't deliver. No matter how much they manipulate it, the world will keep buying it and is.

  2. Doug | June 27, 2012

    Henri,
    There exists the President's Working Group on Financial Markets whose members include
    the Federal Reserve Chairman, the Treasury Secretary, the Chairman of the Security and Exchange
    Commission and the Chairman of the CFTC. They have been complicit in allowing the huge con-
    centrated and malipulative short position held by JP Morgan to continue which has artificially
    suppressed silver prices and to a lesser extent gold. This tampering with commodity law is totally
    immoral and illegal. The last thing the government wants is for a tread to get under way for
    investing in things that have real intrinsic value instead of paper debt liabilities which have an
    intrinsic value of zero.
    Doug

  3. Jay Curtis, author of THE CODE | June 27, 2012

    Peter, I hope you are right. My portfolio is grossly under water right now consisting of mostly gold/silver mining stocks, and other natural resource stocks. I keep thinking the markets will explode to the upside any day now but my anxiety goes up (but not my resolve that I am on the right side) as gold and silver slip.

    The real question (million dollar question for me) is WHEN? How soon will gold reach $2,000 oz and silver hit $100?

    Any thoughts on timing?

    • Frank | June 28, 2012

      The Euro is saved! Haha, for the short run anyway. Google euro banks news.
      Now the dollar will depreciate faster than the euro. Gold sky high. Be sure to sell not too long after the price per ounce of gold is crossed over by the price of shares.

  4. T. Lepere | June 27, 2012

    The next UP for gold prices needs CEOs to thoroughly focus on keeping production costs DOWN! Natural Gas as opposed to using Middle Eastern petroleum products such as oil from Saudi Arabia would be one of the BEST WAYS to ACCOMPLISH cost-savings in the mining industries. I'm not a Mining CEO, but this type of "business sense" in lowering production costs would do a great deal toward producing profits for gold and silver mining companies. That's my FREE advice and I'm NOT earning millions of dollars per year as a CEO of a mining company! Just do it! and the next leg UP will be to the benefit of silver & gold mining INVESTORS! Why can't the highest paid CEOs of mining companies solve such PODUCTION COST problems and EARN their worth in salaries and in bonuses from the mining companies?

    Sicerely,

    T. Lepere
    Disabled Vietnam Veteran

  5. RUSS SMITH | June 28, 2012

    Hi!, Patrons Of Money Morning Et Al:

    There's a real realization evolving from our financial mess isn't there & that is what is legal and/or moale is being side traced in favor of what provides officialdom the advantage in their monetary efforts to control the rest of us who must pay their bills, use their money and vote for their whims again and again; while morality & truth get starved out of the whole messy picture!? Bill Bonner who writes The Daily Reconing and others are calling for the complete, catastrophic fall of their Empire of debt ASAP; while Doug Casey's advise is for us to always remain on the legal side of life, while whenever possible keeping faith with his intentions whenever legally possible "to starve the beast to death!" So, Patrons, let's get into a mood of starving their policies legally. Let's get some real Constitutional money. We need in my opinion to petition OUR US Treasury Dept. to abide by Article 1; section 10 of OUR Constitution which calls for specie gold and silver coins as OUR only monetary units to circulate in lieu of all debts both publc & private and the Constitution doesn't say we should have to purchase gold and silver coins either and so one way to legally starve this beast would be for the beast to relinquish our repostitory gold being presently stored in Colorado, New York & Fort Knox, Kentucky into OUR hands for FREE as mandated them by OUR Constitution and then we will kow where OUR gold is in OUR possession not stored in their possession any longer huh? They have done everything they can to keep OUR gold locked up from OUR use haven't they but why? When Nixon closed OUR gold window on August 15, 1971 thereby declaring international bankruptcy of the United States, did he close it to salvage what gold we have on hand or because the real deal gold is no longer in these repositories? Puting OUR gold into OUR possession will kill all doubts, concerns & uncertainties regards OUR gold wouldn't it?

    RUSS SMITH, CAIFORNIA
    resmith@wcisp.com

  6. Richard | June 28, 2012

    For those who are giddy about holding gold and silver metals, they are taxed as collectables at 28%, which fact sellers do not mention to buyers–not to disuade you from buying them.

  7. Will dub | June 28, 2012

    Is this going to create a new bubble with gold?
    I bought 20 ounces 6 months ago and since then it's down €100 per oz
    I also bought 10kilps of silver in anticipation of this $200 an ounce!

    In diffence I know a couple of financial dealers and brokers who are only taking their bonus'es in gold Boulion.

    It's nerve racking over here in Europe with the clowns running the show and not knowing what their doing where their taking us and whats going to happen to the euro.
    Cheers Will

  8. jack ferguson | June 29, 2012

    Where is silver in all this??

  9. suzi | July 6, 2012

    Peter
    IF Gold is valued via the US $ ~~ whats the US $ valued against ??????? answer PLEASE

  10. ian grieve | July 16, 2012

    Hang on to your gold & silver for the next six years and buy on the dips ,You will be glad you did

  11. Dave Braga | July 20, 2012

    If JPM and others are shorting big time on silver, how come we never hear about an expiration date on their contracts?? Whenever you buy a PUT, there's always an expiration date. I guess, unless you're a crooked bank where you can just push the date out to whatever you want when it suits you.

  12. toedtman | August 8, 2012

    To Dave: A short and a put are not the same thing, but both can be "rolled" into new contracts.
    To Ian: good advice.
    To suzi: Internationally the dollar "floats" in value against other currencies. They are worth what the world thinks they are worth. Gold is revalued in each currency as they fluctuate in value.
    To Jack: Silver is valued as an industrial commodity except when it is recognized as money which seems to happen every time gold goes up.
    To Russ: A good way to starve the beast is to move your bank deposits from big banks to a community bank or credit union.
    Buy physical gold and silver before a shortage develops. Trusted alternatives from Sprott, and some others are good , but if you buy paper gold like GLD or SLV you will end up with paper money, and these 2 ETFs are controlled by the big banks.
    to all: Sitting on losses and waiting is difficult, but patience will be rewarded. Buy the dips, and wait. The rest of the world are increasing trade in their own currencies and the reserve currency status of the dollar is diminishing. I realize things might not looks so bad at present, but our currency is headed for the dustbin, and it would be wise to prepare for this.

Leave a Reply

Your email address will not be published. Required fields are marked *


9 − three =

Some HTML is OK