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View Diary: China Cuts US Credit Rating. Obama Cuts Hawaii Vacation Short. (171 comments)

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  •  The Basel III accord of 2010 (5+ / 0-)

    ...which is being implemented by the world's central banks, has changed the game:

    The Basel Committee on Banking sets the standards followed by the industrialized world’s central banks (and the commercial banks they oversee).

    According to the Basel Committee’s new rule, known as “Basel III,” as of the New Year 2013, gold will be counted at 100 percent of its market value when a bank’s assets are audited. Moreover, under Basel III, a bank’s tier one assets must rise from 4 percent to 6 percent of its total assets. This means that many banks are likely to replace substantial portions of their mortgage-backed securities and bond portfolios with gold.
    Additionally, Basel III increases banks holdings of gold to full market value, which doubles the value of gold reserves held by banks (central and commercial).
    Previously, according to the dictates of Basel I (in 1988) and Basel II (in 2004), gold was a “tier three asset”, counted at only 50 percent of market value on the banks’ books.
    Previously, government bonds and mortgage backed securities were “tier one” assets. As such, they were counted at 100 percent of face value. But, today. it is clear that they could be worth only pennies on the dollar -- due to the lack of banking regulations..
    Basel I and Basel II were based on the now debunked belief that sovereign bonds were as good as cash. In fact, for banks, those bonds were even better than cash, as bonds carried an interest rate while acting as bank reserves. But, as the events in Europe have so amply demonstrated, bonds are only as good as their counterparty issuer. If that issuer cannot repay, or repays in a debauched currency, the bonds lose value.
    With Basel III new recognition of gold as a Tier One banking asset, the world will be looking at currencies and credit worthiness in an entirely different way.

    Since there is no counterparty to gold. It is immutable. It never changes in real value (as opposed to nominal value). What an ounce of gold could buy in 1913, when the Federal Reserve began inflating the money supply, an ounce of gold can buy today. But it takes $23 today to purchase what a $1 could buy in 1913.

    Basel III is an attempt to harden banks’ balance sheets against another financial meltdown. The more gold a bank acquires, the more likely that bank will survive the next wave of sovereign defaults, either through outright inability to pay (such as Greece, as long as it retains the Euro) or debt monetization (like the endless “quantitative easing” programs of the U.S. Federal Reserve).

    Denial is a drug.

    by Pluto on Wed Dec 26, 2012 at 11:25:03 AM PST

    [ Parent ]

    •  Excuse the cynic in me (2+ / 0-)
      Recommended by:
      ozsea1, Larsstephens

      How will this gold be verified?

      Will there be a centralized deposit issuing certificates of ownership?

      It's difficult to be happy knowing so many suffer. We must unite.

      by War on Error on Wed Dec 26, 2012 at 11:29:13 AM PST

      [ Parent ]

    •  As a reserve currency, the Dollar is rapidly (4+ / 0-)

      ...and deliberately being eclipsed by nations with stronger balance sheets. The world's central banks are scrambling to exchange their dollar reserves for gold.

      The United States has not added any gold to its reserves since August 1971. That is when President Nixon, seeing the rapid depletion of U.S. gold reserves stemming from European fears of an oversupply of U.S. dollars, abandoned Bretton Woods. That action ended the convertibility of the dollar (the reserve currency for the world’s central banks) into gold for government-to-government transactions.

      The United States is nearly alone in its failure to supplement its gold reserves. Countries the world over have been adding to their gold reserves at a frantic pace:

      Since October 2011, Turkey has added more than 123 tonnes of gold to its reserves.

      Since February 2011, Mexico has purchased more than 100 tonnes of gold.

      In March 2012, the Philippines added 32 tonnes to its reserves. This gold was over and above the gold purchased from its domestic mines.

      Russia has been buying large quantities of gold for several years, adding 15.5 tonnes to its reserves in May 2012. Russia’s total gold reserves now stand at 911.3 tonnes, the highest level since 1993.

      Thailand has raised its gold holdings by more than 80 percent since mid-2010.

      South Korea has bought 40 tonnes of gold since May 2009, a 180 percent increase in its reserves.

      China refuses to say how much gold it is buying from abroad, but it is the world’s largest gold producer and requires domestic producers to sell 100 percent of their output to the central bank.

      At the end of 2011, Venezuela ordered the repatriation of 211 tonnes of its gold reserves held in Switzerland, the U.K. and Canada.

      Germany is contemplating taking similar actions.

      Since 2010, central banks the world over have “turned on an Eagle” (to “coin” a new phrase), becoming huge net buyers of gold, buying back more than a thousand tonnes.

      Credit agencies will will look at this when rating currencies from here forward.

      Sooner than we expect, Dollars may not be accepted from the US for trade. A less risky currency will be demanded, instead.

      Denial is a drug.

      by Pluto on Wed Dec 26, 2012 at 11:34:20 AM PST

      [ Parent ]

      •  Also, China has done 1.6 trillion yuan in (1+ / 0-)
        Recommended by:

        currency  swaps with 18 countries around the world (about 160 billion US$). Other countries such as India/Japan have also done swaps. Many of these have now become permanent deals. These swaps reduces the amount of US$ required to be held in reserves.
        Experts: Chinese Yuan Destined to Become More Dominant

        China’s rising economic trajectory means the yuan could eclipse the dollar as the world’s top currency, experts say.
        “There are many uncertainties about how the U.S. will respond to the dollar’s possible loss of dominant status,” he said. “We are therefore not sure whether the transformation of international monetary system will take place smoothly and peacefully.”

        •  I didn't mention that, but of course, (1+ / 0-)
          Recommended by:
          Claudius Bombarnac

          ...currency swaps are exploding and entire regions, like South America, are avoiding the Dollar in trade as much as possible. So much, in fact, that the US has sunk to number 3 as a trading partner for them in just the past year. Reducing trade with the US means you don't have to accept Dollars or hold risky Dollar reserves in large amounts.

          After the petrodollar falls away, the US trading advantage will come down to murder weapons and weapons of war -- their chief export and the foundation of their GDP. I see that as sustainable in that the American culture came into existence only after the invention of the gun -- and knows no other reality or history. It is the foundation and identity of that culture and it is what they do best. Plus, the technology is subsidized with more than half of all government revenues, making it a nation driven enterprise both in supply AND demand.

          Denial is a drug.

          by Pluto on Wed Dec 26, 2012 at 01:30:55 PM PST

          [ Parent ]

      •  So, whichver 'nation' the solid gold mega kilo (0+ / 0-)

        apollos object strikes will become, by default,
        the new global reserve currency of record?
        Regardless of what the subsequent impact
        would do to its physical infrastructure or
        its citizens, or governance, culture, and society?

        Silly me. I thought that AU
        stood for Astronomical Units,
        not gold. My mistake.

        Is that the equivalent
        of the invisible hand
        throwing a spitball?

        While I understand the desire for a finite
        and stable reserve for any currency,
        doesn't the reliance on this one commodity,
        make each extremely vulnerable to even just
        one major, or perhaps even minor, discovery?

        Does this prove that the nations of the world
        have returned to a de facto "gold standard",
        merely by their own purchasing actions and strategies?
        Save for the US of A? Something is not adding up here.

        Thanks for all of your efforts.

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