Could changes to bank collateral send the gold price into the stratosphere?

We all know that gold is set to continue soaring in value over the medium term. All the commodity analysts around the world have revised their expectation upwards now that ‘big spender’ Obama has been re-elected.

It doesn’t take a genius to realise that the weak Dollar, a crumbling Euro and further tensions in the Middle East will all contribute to physical gold rising in value as the natural safe haven asset. But there’s also an unexpected source of fuel to this brightly burning fire. Our old friend – the banks.

Harsh bank collateral requirements

You see, while the banks have been blamed as the cause for your equities and bonds crashing in value, the very same institutions could be set to provide a huge catalyst to your gold holdings. The credit crunch and subsequent global crash have rocked the very foundation of the global economy and how money is leant and borrowed. It’s universally agreed that changes have to be made to ensure this doesn’t ever happen again. The obvious revision is to the way banks themselves lend and just as importantly the prudence they take with bank collateral for bad debts.

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When a bank lends out money, it has to put a percentage away as bank collateral, a type of reserve to cover any losses from bad debts. This in theory protects the bank and other lenders/borrowers from suffering losses should a debtor fail to repay debt. The Basel accord is a set of laws set by influential central bankers to determine how much capital banks should hold and in which form this capital can be.

The types of assets financial institutions need to hold are split into three

PHYS01_Animated_Gif_2_MPUclassifications or ranks. Tier 1 assets are cash and Government bonds. Mortgages qualify as Tier 2 assets, while the bottom rung is made up of assets such as gold. The higher proportion of the ‘safer’ Tier 1 capital a bank holds, the more it can leverage its balance sheet. So over the past 5 years as the spotlight has fallen on the banks and they’ve desperately tried to shore up their balance sheets – we’ve seen them selling assets like gold and increasing holdings in Government bonds or cash.

Gold will be used for bank collateral

However, the financial world we live in has changed beyond all recognition, and the powers who set the capital ratios for banks realise this. So the latest version of these rules, known imaginatively as Basel III, looks set to address this. These rules for 2013 address two areas. Firstly, it increases the overall ratio that banks will need to hold in capital. Secondly it’s set to change some of the asset classifications with the most significant change coming to gold! Gold is set to become a Tier 1 asset alongside cash.

This is the first step towards a gold standard with institutions such as the Bank for International Settlements (BIS) recognising gold’s value alongside cash itself.

As BIS notes in its progress report on Basel III implementation:

“At national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.”

Now, we’ve witnessed a steady shift in the holdings of Central banks from holding reserves in Dollars towards a heavier gold holding. They realise that a fast depreciating Dollar does nothing for their reserve levels and only gold can provide a reliable store of wealth. I’m sure banks have also been tempted to shift their reliance on holding paper currency as capital but the traditional tiering ratio has prevented this. Now they have a compelling reason to re-address this balance. With gold set to become the same as cash we will no doubt experience aggressive bullion buying from all the commercial banks in a bid to diversify their capital.

So rather than dwelling on how the banks have destroyed the value of your paper portfolios, recognise the opportunity the banking crisis now offers you.

Buy gold today and watch its value rise, not only from the obvious economic and political instability we’re experiencing, but also from the helping hand the banks are about to offer.


Is the new 24 carat Britannia gold coin any good?

New Britannia gold coin launch

In the past couple of weeks, we’ve seen the launch of the 2013 Gold Sovereign and Britannia gold coin from the Royal Mint.

While the new Sovereign coin is pretty much the same as recent issues, the latest Britannia gold coin represents an evolution. The Royal Mint has made the bold decision this year to produce their 1oz bullion coin in 24 carats for the first time. So why have they done this, and more importantly what are the consequences to UK gold investors?

Indications are that the Mint feels they can increase the global demand for their products by producing the 24-carat coin. There can be tax advantages in some countries for investors buying 24-carat gold rather than its diluted 22-carat version. Certainly, the Far Eastern market tends to demand pure gold, known as “4 nines gold” due to it being 99.99% pure, more than gold mixed with alloys. So undoubtedly there are advantages for the global market. But how will this change affect UK investors? Is it just as positive for us?

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Let’s first of all deal with the misconception that you somehow get more gold with a 24-carat coin. You don’t! Generally, a 24-carat gold coin will weigh around 31g whereas its 22-carat cousin may weigh closer to 34g. So in both coins, you will receive around 31g of pure gold, with an additional 3g of alloy in the 22-carat coin. So there is no advantage with regards to gold quantity in 24-carat coins.

Possible scratches

How about the way the two coins resist wear and tear? Hands down, the 22-carat coin is

Insider's Guide to gold and silverpreferable from a resilience perspective. If your 24-carat coin is encapsulated or packaged in a way whereby it won’t be handled, then this may not prove to be too much of a problem. But the whole joy of owning physical gold is that you can touch and feel it! Gold is a very soft metal, so in its pure state, it is susceptible to scratches and damage. Regardless of whether your coin purchase is for investment or collection purposes, you now own a damaged coin that is worthless. So while I see some argument for 24-carat coins for collectors, as an investment you want to receive as much liquid gold as possible for your money, which means not paying for packaging and protection. Moreover, you’ll want gold that maintains its integrity and fetches the highest price upon disposal.

This notion is supported by history and the majority of other bullion coins on the market. The fact that most gold coins are 22 carats suggests that this is the optimum mix for this type of gold investment. Certainly, the coin needs to be resilient due to its function as money. So in my mind, one of the reasons the Sovereign coin market is so deep is because coins of 100 years old are still in decent shape and desirable. Will the market for century-old 24-carat coins also prove successful? I don’t think so. The Royal Mint also seems to have lost focus on the original Britannia concept when it launched in 1987. After all, it was developed to piggyback on the success of the South African Krugerrand. This was and still is the most successful investment coin of all time. It was the first gold coin to possess exactly 1oz of gold. The Britannia if you like, was our version or copy of the Krugerrand. What is the purity of the Kruger? Well, 22 carats of course!

Will the new coin price differently to the old one?

One interesting development to keep an eye on over the coming months is that of pricing. There will now be around 25 year’s worth of 22-carat Britannias on the secondary market, mixed with the new 24 carat coins. So how will the two coins price against each other? I guess only time will tell. The new pure coin may trade at a slight premium. There’s always a demand for the latest version of a coin, and this one is 24 carat after all! I’m not sure I would want to pay an additional premium for investment purposes for the reasons of value discussed earlier. Alternatively, we may see the older coins trading at a discount as the market may perceive these as less desirable. If this is the case, I will be snapping those up all day long as supply is limited.

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So while the brand new Britannia gold coin is beautiful and will no doubt prove a huge success for the Royal Mint in opening up global demand for UK coins, the jury is still out on whether it will be as well-received on UK shores. Still, along with Sovereign gold coins, the Britannia (excluding the silver version) remains VAT exempt and Capital Gains Tax-free for UK residents so it’s certainly not worth discounting yet!

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Obama Victory – The day after the night before

Obama is re-elected for yet another term as President and the US are now stuck with a descending economy for at least the next four years! I’m at a loss for words! Has this really happened? Are we heading for the “fiscal cliff” of higher taxes and spending cuts with a President that thinks that health care is more of a priority than our contaminated economy? The answer is yes! It’s Groundhog Day and central banks better turn on their printing machines because Obama has already indicated another round of monetary easing.

Obama: What it means

1)       As Obama closed in on a “victory”, the Dollar lost significant value and prompted investors and countries alike to trigger a mass sell of the greenback.

2)       Given the markets’ understanding that Obama’s plans for the US is catastrophic for the global economy, analysts are expecting inflation to escalate.

3)       Since Obama’s win – the value of Gold has jumped 3% with a host of predictions pointing towards further imminent and long term price increases.

Insider's Guide to gold and silver

4)      Further gold price drivers are international crises such as the Israeli/Iran situation, the recent Syria/Turkey border incident and the longer term threat that the Muslim Brotherhood, which now controls Egypt, will seek to extend its influence in the oil-rich countries in the Middle East tinderbox.

5)      On the supply side, gold miners are running out of high grade ore, there are problems with labour in South Africa, and both working and capital costs have risen substantially

6)      Central banks have now stopped selling their gold and become big buyers.

It’s finally obvious why more and more of the world’s rich are moving their wealth and other valuables away from the economic turmoil in the US and into gold as a safe haven and a hedge against escalating inflation.