Monday, June 25, 2012

Regulators to Classify Gold as Zero-Risk Asset


For the first time, unencumbered gold bullion is to be classified as zero risk, in line with dollar cash, US Treasuries and other explicitly government-guaranteed assets. If implemented, this will be an important step in the re-monetisation of gold and, other factors equal, should be strongly supportive of the gold price, both outright and relative to that for government bonds, the primary beneficiaries of the most recent flight to safety.
Well, on 4th June the Federal Reserve, OCC (Office of the Comptroller of the Currency) and FDIC (Federal Deposit Insurance Corporation) collectively circulated a memo asking for comment on their proposed changes to the regulatory capital risk-weighting framework. Section 11, ‘Other Assets’, specifies that a “zero risk weight” is to be applied to “gold bullion held in the banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis…”.[2]
Indeed, as I wrote in The Canary in the Gold Mine, if gold is re-classified as a zero-risk-weighted asset, “the price is likely to soar to a new, all-time high.”

Editor's Note : If what John postulates is true, during a crisis, gold will be pushed up as institutions and investors seek for zero-risk safe haven asset.

Excerpt from Original Source

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