The Rules Have Changed for the Yellow Metal
What a time to be in the gold markets.
I’ve only been writing about the yellow metal since 2009.
And trading it since 2007.
I first learnt about gold over morning chats with my old man with bad coffee.
In the wee hours of the mornings before we’d head off to school and work, we’d sit around the bench, ciggies in hand, with a cup of Nescafe and shoot the breeze.
It’s here I learned what money really was. Lessons he learnt from his old man who was born just as the stock market blew up in the US at the end of the 1920s.
That digital money put in my bank account from Maccas’ shifts only held the value our government wanted us to have.
20 years on from those chats, I’m still thrilled and humbled that this is how I get to make a living.
Writing about something that has been at the core of my understanding of money for decades.
Few in this industry will tell you to own gold. I know of a financial planner that has been advocating owning the physical stuff for years…only to lose clients over such ‘strange advice…’
In fact, for the last four decades you’ve been actively discouraged to not even bother with it.
It doesn’t pay a yield.
It costs money to store.
‘It does nothing…I mean, it doesn’t even rust,’ one gold expert told me in a late night interview last week.
And he’s right.
Gold does nothing.
Rules have changed for the yellow metal
But the rules have changed for the yellow metal.
And if you didn’t understand the importance of it before, you better get up to date quickly.
Lucky for you, you’ve come to the right place…
Here we all are, stuck indoors with nothing but the internet. Waving to friends at the window or as they drive past.
Something completely foreign to many of us. Our choice to leave the house has been stifled.
That, and many of us have been forced to ditch our daily lattes and go back to instant coffee.
Nonetheless, we have a choice. We can be bored and be entertained by moving images on a screen…or harness the power of human kind’s entire knowledge only being a wavelength away.
In other words, let’s take this opportunity to learn.
We are moving at the slowest pace in a long time, yet markets are moving faster than ever before.
And along with that, so are the rules that govern the markets and financial stability.
One of the most critical rule changes, happened just 374 days ago.
Though chances are you don’t remember hearing about it.
But let me assure you, it’s a big deal.
A little over a year ago, the Bank for International Settlements (BIS) gave physical gold one heck of an upgrade.
Haven’t heard of them? That’s OK. Most people haven’t. The BIS is simply the Central Bank for central banks.
In other words, their guidance and strategies influence the 62-member central banks or money authorities around the world.
In the aftermath of the 2008 financial crisis, monetary stability was a key focus.
See, as stocks around the world were plunging in 2008, it quickly became obvious that most Western banks in the Northern Hemisphere didn’t hold enough capital against their liabilities.
Making them inherently unstable. And if you remember, there was a whole batch of bank bailouts, takeovers, mergers, and defaults that threatened the entire financial system.
So it’s not a huge surprise that powerful entities wanted to prop this back up quick smart.
The way to do it? New rules for banks.
Hence the birth of Basel I, Basel II, and Basel III capital requirements.
These three stages implemented over the past decade forced banks to make sure they had enough top-rated assets to support all that lending they did.
However, under Basel I and Basel II gold was still classed as a third-tier asset.
A third-tier asset simply means — based on the rules by the BIS — any gold banks held would be discounted by 50% against market value.
Meaning, banks might have paid full price for the gold yet when it came to lending out against that, the value of gold was halved.
Because the value of gold was reduced, what banks could lend against it was reduced. Giving them little incentive to buy the yellow stuff.
Yet on 29 March 2019 that changed.
This is the date gold went from a tier three asset to a tier one asset in the blink of eye.
That’s one heck of a status upgrade for something that has been demonised for the better of three decades from central bankers and governments alike.
Suddenly the BIS had admitted that gold was money.
It could be trusted like cash or a Treasury Bond.
The Central Bank of all central banks told us gold had value…
Create your own gold standard
When these new requirements came into force, many gold bugs on the internet speculated that this would be a rocket under the gold price.
Finally, the true value of this metal would be revealed.
While gold rallied — up 25% in US dollar terms — the rocket-like rally didn’t come.
That is, Basel III declaring gold to be on equal footing isn’t the sole driver of the gold price. It’s much more nuanced than that.
That, and banks didn’t go rushing in to buy gold as part of their reserves. Why would they? It’s partly because holding physical gold has costs associated with it that digital treasury bonds do not.
To boot, they have no incentive to rush out and buy something where its value fluctuates wildly. We don’t have a gold standard where the price is fixed.
Banks have no interest in buying tier one assets where their value remains unpredictable. Which in turn makes their ability to lend reduced.
However, today I urge you to consider what I learnt around the family kitchen bench all those years ago. Gold is money.
Banks will always chase what will give them the highest profits relative to the risks they are allowed to take.
A luxury you don’t have.
With the BIS moving gold from zero to hero, it’s a signal that lets you know the most powerful central bank of all values the yellow metal.
Which shows some sort of monetary reset is on the horizon, but it won’t happen overnight.
It’ll likely take a few more years to play out.
That gives you time to follow the BIS lead. To slowly, over time, increase your exposure to physical gold.
That way, whatever reset does happen, you will have acted like the central bank of last resort, and prepared yourself accordingly.
With the stock market uncertainty and banks not paying a lick of interest, it’s time for you to create your own gold standard.
But before I leave you today, check out this interview Vern Gowdie recently recorded.
Remember last week I told you that he was the only person I know to say a market crash was imminent in January this year?
Well, in this interview today, he reduces all this market noise down to something ever so simple. That all the economic stimulus coming from the government, isn’t remotely enough to replace what what’s been taken out.
Until next time,