Basel 3 and gold
Sprott has a good article out on Basel 3 and gold. Two key quotes:
"It is our understanding that gold’s reference as a “zero percent risk-weighted asset” in the FDIC and BIS literature only applies to gold’s “credit risk” - which makes perfect sense given that gold isn’t anyone’s counterparty and cannot default in any way. Gold still has “market-risk” however, which stems from its price fluctuations, and this results in the bank having to set aside capital in order to hold it."
The "market-risk" aspect is what a lot of commentators who have been saying Basel 3 is great for gold have been missing. If you are not a bullion bank with gold assets already on your books, are you really going to choose gold over cash or bonds when gold is volatile and any fall could wipe out your equity (given their leverage).
I do however take Sprott's point that compared to cash and bonds, gold "provide[s] banks with an asset that actually has the chance to appreciate" and so may be able to compete for space on a bank's balance sheet.
"Basel III will also soon require the application of risk-weights to be applied to the LIQUIDITY profile of both the assets and liabilities held by the bank. ... Under the proposed LIQUIDITY component of Basel III, gold is currently labeled with a 50% liquidity “haircut”, which is the same haircut that is applied to equities and bonds. This implicitly assumes that gold cannot be easily converted into cash in a stressed period, which is exactly the opposite of what we observed during the crisis."
World Gold Council has been working on getting this down but at this time the gold market is still small compared to bonds and equities so at best will have potential only to be a marginal part of a bank's assets IMO.
"It is our understanding that gold’s reference as a “zero percent risk-weighted asset” in the FDIC and BIS literature only applies to gold’s “credit risk” - which makes perfect sense given that gold isn’t anyone’s counterparty and cannot default in any way. Gold still has “market-risk” however, which stems from its price fluctuations, and this results in the bank having to set aside capital in order to hold it."
The "market-risk" aspect is what a lot of commentators who have been saying Basel 3 is great for gold have been missing. If you are not a bullion bank with gold assets already on your books, are you really going to choose gold over cash or bonds when gold is volatile and any fall could wipe out your equity (given their leverage).
I do however take Sprott's point that compared to cash and bonds, gold "provide[s] banks with an asset that actually has the chance to appreciate" and so may be able to compete for space on a bank's balance sheet.
"Basel III will also soon require the application of risk-weights to be applied to the LIQUIDITY profile of both the assets and liabilities held by the bank. ... Under the proposed LIQUIDITY component of Basel III, gold is currently labeled with a 50% liquidity “haircut”, which is the same haircut that is applied to equities and bonds. This implicitly assumes that gold cannot be easily converted into cash in a stressed period, which is exactly the opposite of what we observed during the crisis."
World Gold Council has been working on getting this down but at this time the gold market is still small compared to bonds and equities so at best will have potential only to be a marginal part of a bank's assets IMO.
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