Gold has had trouble in being accepted as a key player in the global financial system. However, new developments may change how investors and institutions view the precious metal.
The Office of the Comptroller of the Currency, the FDIC and the Fed are talking about placing a zero-risk weight rating on gold bullion held in banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis.
The move will essentially place gold on the same risk level as cash: zero percent. Historically, gold has had a risk weighting of 50%. If the proposal stands, banks will not have their regulatory capital ratios punished for holding gold, instead of government bonds or fiat currency, as a safe haven. This will help gold be seen more as a true safe haven in financial markets and further drive gold bullion demand, which is already at historic highs among central banks.
One reason why gold has not been acting like a safe-haven asset in recent months is because banks are so capital-impaired that they are scrambling to reduce their holdings of risky assets in favour of so-called zero-risk weighted assets, against which they needn’t set aside any regulatory capital. As it stands, gold has a 50% risk weighting. But some government bonds, including US Treasuries, German Bunds and British gilts, are zero-risk weighted. Interestingly, the credit ratings of both the US and Germany were recently downgraded; reevaluating the meaning of ‘zero risk’ appears to be long overdue.
Approving the proposal may not make gold prices skyrocket overnight, but it will reinforce the idea that gold is an important financial asset that lacks counterparty and downgrade risk, making it the ideal safe haven. Some of the world’s largest and most powerful organizations have already realized this. The BIS recently reported a profit of Special Drawing Rights 758.9 million; about 15% of that profit came from the sale of physical gold and the repayment of gold loans. Apparently, gold is not as lifeless as some may think.
To read Eric McWhinnie article: Is Gold a Zero Risk Financial Asset?
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