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Could we See Gold as a Tier One Asset Again?
There has been some news out of London that has largely gone unnoticed. This news could have a huge impact on the value of your gold and silver holdings! The Basel Committee for Bank Supervision (BCBS) is considering changing gold´s status to a tier 1 asset with 100% weighting. Currently gold is a Tier 3 asset with a 50% weighting and these changes would realign Gold to its original status prior to August 15, 1971.
The impetus for the BCBS´s proposal is very clear. The commercial banking system needs beefing up if it is going to avoid another global meltdown. Commercial banks currently have to hold 4% of their holdings in Tier 1 assets. Should the BCBS´s plans be implemented this will increase to 6% by January 2013 with a possible higher weighting in 2018. The one asset with zero counter party risk is gold. Tier 1 assets are AAA rated holdings according to the rating agencies.
Central banks are also buying gold for the same reason. For over thirty years gold has been forgotten by banks and deemed a barbaric relic of the past. Currently the top 110 Central Banks hold on to approximately 16% of their reserves in gold. If commercial banks are required to convert just a few percentage points of their tier 1 assets into gold this could have a dramatic effect on the future value of gold and silver.
What is the Basel Committee for Bank Supervision? The committee provides a forum for regular cooperation and banking supervisory matters. They work to improve the quality of banking supervision worldwide. The BCBS is part of the Bank for International Settlements (BIS).
For a few years now many of us in the metals industry have been speculating that such an action could occur. What other options do the banks have? Could this mean we may see a dramatic revaluation of gold? Silver on the other hand is the bystander that may benefit the most from this possible decision to bring gold back to tier 1 status. Gold and silver have traditionally been priced at a consistent ratio of 16/1 until 1980. Currently we see a 60/1 ratio. If gold is revalued or rises steadily silver will outperform gold. This is quite possibly the biggest news of the year for those of us who follow gold and silver.