Under “Basel III” Rules, Gold Becomes Money!

March 18, 2019 by Jay Taylor
Thanks to Chris Powell of the Gold Anti Trust Action committee (GATA), I was alerted to the fact that on March 29^th, new BIS rules, termed “Basel III,” will go into effect. Those rules will allow physical gold bullion (but not paper gold) to be on a par with cash and sovereign debt instruments.  If banks own and possess gold bullion, they can use that asset as equity and thus this will enable them to print more money.  It may be no coincidence that as March 29^th has been approaching banks around the world have been buying huge amounts of physical gold and taking delivery. For the first time in 50 years, central banks bought over 640 tons of gold bars last year, almost twice as much as in 2017 and the highest level raised since 1971, when President Nixon closed the gold window and forced the world onto a floating rate currency system.

But as Chris Powell of GATA noted, that in itself is not news. The move toward making gold equal to cash and bonds was anticipated several years ago. However, what is news is the realization by a major Italian Newspaper, II Sole/24 Ore, that “synthetic gold,” or “paper gold,” has been used to suppress the price of gold, thus enabling countries and their central banks to continue to buy gold and build up their reserves at lower and lower prices as massive amounts of artificially-created “synthetic gold” triggers layer upon layer of artificially lower priced gold as unaware private investors panic out of their positions.

The paper concludes that “In recent years, but especially in 2018, a jump in the price of gold would have been the normal order of things. On the contrary, gold closed last year with a 7-percent downturn and a negative financial return. How do you explain this?


“While the central banks raided “real” gold bars behind the scenes, they pushed and coordinated the offer of hundreds of tons of “synthetic gold” on the London and New York exchanges, where 90 percent of the trading of metals takes place. The excess supply of gold derivatives obviously served to knock down the price of gold, forcing investors to liquidate positions to limit large losses accumulated on futures.



“Thus, the more gold futures prices fell, the more investors sold “synthetic gold,” triggering bearish spirals exploited by central banks to buy physical gold at ever-lower prices”.


James Sinclair, and last week Alasdair Macleod, noted that the only way governments can manage the levels of debt that threaten the financial survival of the Western world is to inflate (debase) their currencies. The ability to count gold as a reserve from which banks can create monetary inflation is not only to allow gold to become a reserve on the balance sheet of banks but to have a much, much higher, gold price to build up equity in line with the massive debt in the system.

Here is the English translation of the II Sole/24 Ore article titled “Banks and the Return of the Gold Standard: Gold in Financial Statements Becomes Money” 



Banks and the Return of the Gold Standard: Gold in Financial Statements Becomes Money
By Alessandro Plateroti Il Sole / 24 Ore, Milan, Italy
Monday, February 25, 2019
https://www.ilsole24ore.com/art/finanza-e-mercati/2019-02-24/banche-ritorno-gold-standard-l-oro-bilanci-diventa-moneta-091055.shtml


“In the gold market there is a cold war climate: For the first time in 50 years, central banks bought over 640 tons of gold bars last year, almost twice as much as in 2017 and the highest level raised since 1971, when U.S. President Richard Nixon closed the era of the gold standard.
“The interesting fact is that the European central banks, together with the Asian ones, have been the most aggressive in their purchases. Is this fear of the euro crisis and currency wars?


“In reality, and this is especially true in Europe, behind the great maneuvers with gold reserves there is not only the traditional protective shield against major risks; there is also the call of opportunity. A reminder of which few still seem to know, though the appointment is now a matter of a few weeks: March 29, 2019. The day of judgment for the Brexit will also be the advent for the gold market.


“It is not clear whether by choice or by chance, the Bank of International Settlements in Basel, Switzerland, called the “central bank of central banks,” for its key role in the world financial system, has set an appointment with the story for March 29: Resurrection of the gold standard in the banking world.



“For almost 60 years, the gold standard has regulated the convertibility between gold and dollar, engaging the market value. In 1971 it was the American president Richard Nixon, frightened by the bearish pressures that were likely to sink the dollar in the cold war, to cut the cord with gold, decreeing the end of the gold standard.



“Now something starts moving in the opposite direction.
“… Gold as cash
“The Sun / 24 Hours has discovered that among the complex but well-known reforms of the standards for credit and finance from the “Basel 3” plan, there is an accounting alchemy that can turn gold into money on the balance sheets of the large banking groups. From March 29, by decision of the BIS, the gold in the portfolio of commercial and business banks
becomes “cash equivalent,” an asset equivalent to cash and therefore “risk-free.” In fact, it is the first “reassuring of gold” since the time of the Bretton Woods agreement. Technicians call it “gold remonetization,” a process that is the reverse of the “demonetization” of gold decided by Nixon.


“… Same status as sovereign bonds
“The operation of the BIS, as reconstructed by The Sun / 24 Hours, carries the signature of the Federal Reserve, the European Central Bank, the Bundesbank, the Bank of England, and the Bank of France, the G-5 of the great global monetary powers. In 2016, when the new rules of the banking system included in the “Basel 3” package were defined, the central bankers committee inserted an epoch-making norm that no one, however, has ever openly discussed in public.



“In practice, gold in “physical” bullion — hence not under the “synthetic” form of certificates — will return to be considered by regulators as the equivalent of the dollar and the euro in asset security, thus eliminating the obligation to weigh the risk for the purpose of capital absorption, as with any other financial asset, excluding (for now) eurozone government bonds.



“The turning point is not insignificant for the gold market and for the very role of national gold reserves. The result is significant: With the new rules of Basel 3, gold is given the same status that is now recognized for sovereign bonds on bank balance sheets.



“A question therefore arises: Is the promotion of gold the premise for applying a weighting of risk to the government securities held by banks? From the debt crisis, the regulators’ objective was in fact two-fold: to require the banking system to hold an adequate equity to cover the risks. In the crosshairs there are mainly the government securities that according to current rules can be held by banks without any impact on their assets. The issue mainly concerns low-rated countries such as Italy, Spain, Portugal, and Greece, which were seen to be special after the debt crisis in 2011.


“The banks of these countries, both to increase profitability (carry trade) and to facilitate the issue of public debt in auctions, have the highest amount of government securities in the euro area. And this phenomenon is particularly felt in Italy, where the banking system has 400 billion BTp on the 2.4 trillion of public debt. What would happen then, if it were applied to risk weighting on Italian government bonds as the Basel committee wants?



“The consequences depend on the level of risk weighting applied to the Italian government bonds. If it were high, some banks could be forced to replace the securities with other financial assets, including gold, or to proceed with capital increases. At a time when the market is reluctant to buy bank shares, the risk of repercussions on the stability of the banking system could be high. Just look at the credit default swaps (default risk insurance) on Italian banks. According to Bloomberg data, the five-year credit-default swaps of some of the major Italian banks have surged since the spring of 2018, even tripling the value in some cases. It is in this context that the date of March 29 is approaching rapidly.


“Countries that have repatriated gold from abroad, regaining control and management, are already protected from the risk of being short of physical gold after March 29 to make available to their banks in case they want to replace sovereign bonds with it. In the arsenal of the system, there is a golden mountain of 33,000 metric tons of gold worth $1,400 billion at the current exchange rate. And that represents 20 percent of all the gold extracted in the world in almost 3,000 years.



“As usual, the most forward-looking and prudent countries — or perhaps the best-informed about the turnaround coming at the end of March — were Germany, Holland, Austria, France, Switzerland, and Belgium. But Poland, Romania, and Hungary also regained control of gold reserves, increasing their consistency.



“China, Russia, India and Turkey have been the nations that have bought gold in the last two years more than anyone else, with Moscow having even liquidated its entire portfolio in U.S. government bonds to replace them with precious metal. But the problem is not this; it is the price of gold.


“In 2018 as many as 641 tons of gold bars were bought by the monetary authorities of every continent, but above all in Europe, it is the highest level since 1971. The maneuver is unprecedented and should be seen in the phenomenon of repatriation of ingots of state custody. Seven thousand tons of gold reserves were withdrawn by central banks from the coffers of the Federal Reserve Bank of New York, while 400 tons were secretly released by the Bank of England.



“In recent years, but especially in 2018, a jump in the price of gold would have been the normal order of things. On the contrary, gold closed last year with a 7-percent downturn and a negative financial return. How do you explain this?


“While the central banks raided “real” gold bars behind the scenes, they pushed and coordinated the offer of hundreds of tons of “synthetic gold” on the London and New York exchanges, where 90 percent of the trading of metals takes place. The excess supply of gold derivatives obviously served to knock down the price of gold, forcing investors to liquidate positions to limit large losses accumulated on futures. 



“Thus, the more gold futures prices fell, the more investors sold “synthetic gold,” triggering bearish spirals exploited by central banks to buy physical gold at ever-lower prices.



“With this system, those looking at gold as a safe haven, like China, India, Russia, and Turkey, have practically doubled their gold reserves in the last five years.



“Moscow, to buy gold, has even sold the last 20 percent of the U.S. government bonds it held in currency reserves.



“How compatible is such a situation with the duties of correctness and transparency of a central bank? Certainly, the system created by the Anglo-American “Goldfinger” seems to be made for abuses. Who knows what will happen after March 29?”


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