Much of the talk, both mainstream and “underground” on the internet is currently centred on what the next “black swan” will be. Will it be a Greece default? More middle eastern riots and government overthrows? A break up of the Euro-zone, or the (comical) US debt ceiling not being raised, that causes gold to lurch higher? (Truth be told these aren’t black swans as a black swan by definition is something unusual and unexpected).
But, what if it was a more positive event that instead caused gold to move higher?
Frank Holmes, head of the investment management firm US Global Investors, just wrote the following article, “Is Gold About to Have Its Status Upgraded?” http://www.usfunds.com/investor-resources/frank-talk/?i=5935
In this he comments on recent events including how countries such as Russia Mexico and Thailand are adding to their gold reserves. So much so that in 2010 central banks became net buyers of gold for the first time in 21 years -instead of net sellers.
Also he states, how in February of this year JP Morgan announced that it would begin “accepting gold as collateral to satisfy securities lending and repo obligations with counterparties”.
Plus how just last month “the European Parliament’s Committee on Economic and Monetary Affairs (ECON) agreed to accept gold as collateral”.
These are all positive developments for gold. Mr Holmes also posits the theory that global banks could follow the central banks lead and begin adding gold to their balance sheets if the Basel Committee on Banking Supervision (BCBS), upgrades gold from a “Tier 3” asset to a “Tier 1” asset. The BCBS is effectively a global banking regulator ensuring that banks have enough capital.
He includes a definition of a Tier 1 asset:
A high quality, liquid asset that must have exchange-related characteristics. Criteria include low credit and market risk, certainty of value, low correlation with risky assets, and listing on a developed and recognized exchange. There are also market-related criteria to determine whether an asset is a part of an active market, there are adequate market makers and what happens to the asset’s value when there’s a flight to quality.
Sounds like gold to us! But hard to believe bankers agreeing on golds “low correlation with risky assets”. As we’ve written about recently the mainstream economists still view gold as inherently risky.
But if this upgrade comes to pass this will be a significant step for gold regaining some of its lost recognition.
Mr Holmes concludes by saying:
“There’s been no official word from the BCBS yet on an official upgrade of gold to Tier 1 status but some think it could come as soon as the third quarter of 2011. If an upgrade were to take place, it would likely have a profound impact on gold and gold equities. We anticipate that central banks around the world would add (some of them significantly) to their gold positions, which would further tighten gold supply and increase gold consumption.”
It’s hard to disagree with this statement of his. We recall that back towards the end of 2009 it was the news that India had bought 200 tonnes of gold that the IMF had up for sale, which sent gold skywards in just about every currency. Gold rose over $100US dollars in the space of month following the news. Locally the price went from around $1500 to $1700 NZ dollars during the month of November 2009.
So this in effect was gold positive news rather than negative news or a “black swan” that drove more gold purchasing. It would be appropriately contrarian for something of this nature to be the driving factor in the next up leg rather than all the negative factors being discussed currently. We’ve also heard from more than one respected gold commentator that they wouldn’t be surprised to see gold shake off the usual northern hemisphere summer doldrums and instead break higher in the next few months.
Could it be the black swan many are waiting on ends up being a fairly vanilla white one instead?