In this Article
- Basel Accord Spells Opportunity for Gold
- Not All Gold Is Created Equal
- This Could Set Off an Avalanche of Gold Buying
- How to Take Advantage of This Monumental Shift
Yesterday, I told you global central banks are loading up on gold.
They have significantly increased their gold purchases over the last decade or so.
Since 2010, they have added 5,678 metric tons of gold to their vaults. That’s 18% of their total gold holdings.
Even the price of gold nearly doubling over the last seven years hasn’t stopped them.
I also told you they’re ramping up their gold purchases because they’re afraid of inflation… despite how they might downplay these fears in public.
That’s all part of the permanent distortion between the financial world and the real economy I’ve been telling you about. Central banks’ staggering money creation program has helped them pay for all this gold.
Today, I want to reveal why central banks worldwide will buy gold in even bigger quantities in the years to come.
And I’ll show you a couple of simple ways you can position yourself to profit when they do.
Basel Accord Spells Opportunity for Gold
It’s all down to a Switzerland-based institution you’ll rarely, if ever, hear about in the mainstream media.
The Bank for International Settlements (BIS) was set up in 1930. This was in the immediate aftermath of the Crash of 1929.
The BIS is based in Basel, Switzerland. It’s known as “the bank of central banks.”
Its members are 63 central banks from around the world. This includes the four major central banks – the Federal Reserve, the European Central Bank, the People’s Bank of China, and the Bank of Japan.
If you were to draw a pyramid of the most powerful institutions in the world, the BIS would be somewhere near the top.
The BIS facilitates transactions between central banks.
The BIS also issues what’s called Basel Accords. These are recommendations for regulations that set the standards for the banking industry worldwide.
To date, it has issued three Basel Accords…
Basel I was issued in 1988 to minimize credit risk.
It created a classification system for bank assets. And it laid out the minimum capital requirements for financial institutions.
Basel II was issued in 2004.
It expanded the rules for minimum capital requirements established under Basel I. It also provided a framework for regulatory supervision.
And it set new disclosure requirements for assessing the capital adequacy of banks.
Basel III was issued in 2009 in response to the 2008 financial crisis.
It requires banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand.
It basically aims to prevent another global financial collapse by incentivizing banks to hold safer assets.
And that includes gold…
In 2017, the BIS updated Basel III to include clauses specific to gold. It upgraded gold’s official role in the international monetary system for the first time in decades.
The new rules make holding physical gold more appealing for banks and other financial institutions.
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Consequently, it could become a powerful catalyst. It could cause the biggest players in the global gold market to increase their gold buying… even further than they have over the last decade.
Not All Gold Is Created Equal
You see, Basel III gives gold official recognition in the international financial system.
Previously, gold – in any form – was considered a risky asset for central banks to hold.
The old rules put gold – both physical and paper derivatives – in the riskiest category of assets.
But Basel III does two specific things that reduce that risk classification.
First, it moves allocated gold to a Tier 1 asset. This is the safest category (including cash and currencies). Before this, gold was classified as a Tier 3 asset, the riskiest category.
And second, it differentiates between allocated gold and unallocated gold.
With allocated gold, you are the outright owner of a specific physical bar or coin. There are no other claims to it.
With unallocated gold, you are not the owner of the gold. It remains the property of the bank. As such, you essentially become a creditor of the bank.
The institution you buy it from may not even own sufficient gold to back the total value of all the unallocated gold investments it holds. And there could potentially be multiple claims of ownership of the physical metal.
Unallocated gold has been popular with banks. That’s because it’s easier to hold and trade than allocated, physical gold.
But now, under Basel III, banks holding unallocated gold must hold extra reserves against it.
They will have to back 85% of their unallocated gold using other Tier 1 assets.
But allocated gold receives a 0% risk weighting. So it can be treated as cash.
So Basel III gives gold – especially allocated gold – a much sounder footing in the international monetary system.
It aims to keep banks from simply saying they have gold on the balance sheet. And it will avoid them having more than one owner for their gold.
This means that it will incentivize banks to buy actual physical bullion.
And as you’ll see in just a moment, that’s good news for us…
This Could Set Off an Avalanche of Gold Buying
When these changes were first announced in 2017, central banks really upped the ante.
Take another look at this chart I showed you yesterday. You can see a sharp uptick in their gold purchases in 2018…
In 2018, central banks worldwide bought 656 metric tons of gold. That was 75% more than the previous year. It was also the biggest central bank gold-buying spree in history.
And if that’s what happened when the BIS just announced Basel III’s gold changes… consider what could happen when banks actually execute the change.
The changes will be officially implemented in January 2023. This could set off an avalanche of gold buying in the months ahead.
And if this happens to coincide with rising inflation or other favorable market conditions for gold, an even sharper rise in gold prices could follow.
So now is a good time to position yourself in gold…
How to Take Advantage of This Monumental Shift
One of the simplest ways to do this is to buy physical gold.
You could start with buying the most popular gold bullion coins. These include American Eagles and Canadian Maple Leafs.
Actually, one of the sponsors of the recent Legacy Investment Summit was a collectible coin marketer called GovMint.
Their coins come with authentication. And they can be packaged in lovely boxes, so they make great gifts, too. In fact, I’ve bought many coins from them as presents for my nieces and nephews.
Just keep in mind, coins are typically priced at a premium to the gold spot price.
Gold bars are another great option. They have lower premiums than coins.
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Now, the main drawback of investing in physical gold is that coins and bars need to be stored. Doing it safely could mean an additional cost.
So, if you’re new to investing in gold, another way to get exposure to the metal is through a gold exchange-traded fund (ETF).
A gold ETF invests primarily in hard gold assets. And you can buy it through your brokerage account.
Consider the SPDR Gold Shares ETF (GLD). It closely tracks the price of the metal. It offers convenient exposure, without the worry or extra cost of storage and security.
The fund holds gold in an allocated account in London, England. But it is listed on the New York Stock Exchange. So you can buy it through your brokerage account.
It’s a simple way to position yourself ahead of what could be a major catalyst for gold.
Happy investing, and I’ll be in touch again soon.
Editor, Inside Wall Street with Nomi Prins
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