For decades, gold has been viewed by the financial community as the “has been” of today’s monetary policy. But after the 2008 financial crisis, the Bank for International Settlements’ (BIS) began reconsidering gold’s potential toward stabilizing a broken financial system.
Despite the sophisticated means by which central banks have been managing monetary policy, it appears that the BIS, and a number of central banks themselves, have acknowledged gold’s importance as sound money, particularly as these nations seek to diversify their reserves amidst global economic uncertainty and US dollar volatility.
The Basel – III Directive
The primary function of the BIS is to serve central banks in their pursuit of financial and monetary stability. Every now and then, when their regulatory body meets in Basel Switzerland, they come up with a set of guidelines and directives. The most recent guidelines to be enacted are for Basel – III. Basel – III has direct implications for gold as a reserve on central bank balance sheets.
Gold and Central Banks
Not too long ago, central banks viewed gold as a risky “Tier 3” asset. This meant that only 50% of its total market value can be considered reliable in reserve. So, when banks issued loans based on the value of their assets, gold had to be discounted by half of its market value.
With gold officially discounted by half its value, why would banks want to continue holding the metal? Hence, gold was marginalized, the incentive to own it, reduced or abolished.
Fortunately, this changes with Basel – III, making the guidelines something of a real game-changer for the yellow metal.
As Basel – III went into effect on April 1, 2019, gold was officially bumped up to a “Tier 1” asset.
Its valuation is now assessed at 100% of its market value.
As a Tier 1 asset, it is no longer considered “risky” among the world’s major banks. In the eyes of some banking authorities, gold’s attributes as a hedge, particularly against dollar volatility, make it superior to any fiat issue by a central bank.
Despite the fact that many authorities held this opinion throughout the years when gold was still being devalued by 50%, Basel – III now formalizes the acknowledgment of gold at full value, allowing central banks to acquire gold without fears that their holdings will be discounted well below the price of purchase.
Hence, the massive central bank gold purchases that we’ve seen in recent years, soaring to levels not seen since 1971.
With gold now a Tier 1 asset, these continuing bank purchases are likely to continue driving the value of gold upward.
Some experts estimate that the growing adoption of the Basel – III directive among banks on a global scale may increase gold demand by 500-1000 tons per year, straining the current supply of available gold on the market.
This increase has already started, which may account for the current rally in gold prices which began even before the Federal Reserve’s announcement to halt interest rate hikes.
What Basel – III Means for Gold Investors
While the investing public hasn’t quite caught wind of the changes effected by Basel – III, it’s important to take into account the winds of (policy) change that has prompted central banks to begin accumulating gold at record levels.
Even a small purchase made by a central bank of a relatively small nation still may be large enough to impact the price of gold. As we’ve seen over the last year, several banks have already begun slowly accumulating gold to add to their reserves.
Now with Basel – III in effect, this buying trend may increase significantly over the coming years, supporting the rise of gold prices.
For gold investors who are interested in accumulating gold near the beginning of a massive price surge, the Basel – III directive serves as a green light to begin loading up on gold now while gold prices are still at favorable and affordable levels.