Gold Gaining Respect

Even the world’s banks have a master, and that master is considering making gold a Tier 1 capital asset in the wake of their string of failures. The Bank of International Settlements is charged with maintaining systemic stability among the world’s banks, and to do that it is considering bringing gold up from a Tier 3 to a Tier 1 asset in the upcoming round of Basel III rules, which would essentially turn gold into currency. As slews of banks get downgraded by ratings agencies, the purchase of gold as a store of value could increase, thereby setting the stage for a surge in gold value. For more on this continue reading the following article from 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In the last couple of months alone, Greek depositors have withdrawn billions of euros in deposits, as the fear of a "Grexit" looms large.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 sell off 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, 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 favor 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.

This article was republished with permission from Money Morning.

Waiting for the Gold Bubble to Pop

With gold prices at a new all-time high, investors may be wondering when the bubble will burst. However, there are many reasons why it may continue to grow rather than pop. Read more in this full blog post from The Mess That Greenspan Made.

The gold price reached a new all-time high today at $1,457 an ounce and most investors are probably just shaking their heads at the craziness of it all – who in their right mind would pay almost $1,500 for a dumb ‘ol one ounce gold coin? Of course, they were shaking their heads at $1,200 an ounce, $1,000 an ounce, $725 an ounce, $500 an ounce, and so on, calling it a bubble ever since the price started rising about ten years ago when you could have bought the metal for about $300 an ounce. That’s one tough gold bubble…

In Frank Holmes latest commentary over at U.S. Global Investors, he explains some of the reasons why the current gold bubble just doesn’t seem ready, willing, or able to pop, the chart below offered up as evidence that, in a world full of increasingly suspect paper money and paper assets where more investors are looking for something other than dodgy paper, the yellow metal remains under-owned.

Citing a recent presentation by Eric Sprott of Sprott Asset Management, Holmes notes that new investment in gold over the last ten years totaled about $250 billion versus almost $100 trillion that went into other financial assets over that same time. That’s not to say that, as a percent of all assets, it will ever get back to the levels seen prior to 1990, but, based on everything that’s been happening in the world lately, it’s certainly headed in that direction.

This blog was republished with permission from The Mess That Greenspan Made.

Gold Investment: Is There Still Room For Growth?

With national debts growing all over the world, a strong case can be made for the future of gold prices. Even though gold values have risen from under $300 in 2002 to nearly $1000 in 2009, some gold experts believe there is still a lot of room for growth. For more on this, read the following article from Dr. Steve Sjuggerud at Daily Wealth.

Yesterday, I spent an hour and a half with two of the most experienced gold investors on the planet...

It was a bit by accident... I was at a private two-day meeting on the Eastern Shore of Maryland, and I needed to leave early to get to the Baltimore airport. Both Van Simmons (my good friend and a legend in the coin world) and ace gold-stock analyst John Doody needed to be at the airport too, so they hitched a ride with me.

At the meeting, John had told us gold stocks will "surprise on the upside" this year. In short, if you don't own gold stocks now, you need to buy. Let me share John's reasons why...

The cost of producing gold is down. According to John, oil makes up 25% of the cash cost of producing an ounce of gold. The price of oil has fallen by over half since last summer.

Also, the value of the currencies in gold-producing countries has fallen. John showed a table including the currencies of Australia, South Africa, and Canada (among others). The currencies had lost between 15% and 40% of their value versus the dollar.

Don't underestimate the importance of this... Much of the cost of production of gold (like local labor costs) is in those local currencies, but the gold is priced in U.S. dollars. In short, a fall in the currency is an instant boost for most gold producers.

So the price of gold is up while the cost of production is down. This directly increases profit margins. Gold-mining companies should report excellent earnings in the next few quarters... surprising on the upside.

John tracks three solid indicators to figure whether gold mining companies, as a group, are cheap or expensive. He looks at 1) market value versus ounces in the ground, 2) market value versus production, and 3) market value versus operating earnings. He tracks these in his excellent, data-heavy monthly newsletter, Gold Stock Analyst.

In his most recent newsletter, John said gold stocks were undervalued by 19% based on the first two of these metrics above.

Lastly, John explained sentiment toward gold stocks is still pretty bad. He had just spoken at the New York Gold Show, which he said was relatively poorly attended.

So gold stocks are cheap based on history... People are not clamoring for them, yet... And with cheaper oil and currencies, earnings of gold miners will surprise on the upside. In other words, if you think you've missed the move in gold stocks, you haven't.

If you haven't bought gold stocks yet, you should. And if you want to get the complete picture on gold stocks, then you should get to know John Doody.

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