Why the turnaround, and at prices much higher than those at which the central banks sold? Because the rules have changed: The Basel Committee on Banking, the body that sets the standards followed by the industrialized world’s central banks (and the commercial banks they oversee), has reclassified gold bullion as a “tier one asset.” According to the Basel Committee’s new rule, known as “Basel III,” as of the New Year, gold will be counted at 100 percent of its market value when a bank’s assets are audited. Moreover, under Basel III, a bank’s tier one assets must rise from 4 percent to 6 percent of its total assets. This means that many banks are likely to replace substantial portions of their mortgage-backed securities and bond portfolios with gold.
Basel III’s increase of gold to full market value doubles the value of gold reserves held by banks (central and commercial). Previously, according to the dictates of Basel I (in 1988) and Basel II (in 2004), gold was a “tier three asset”, counted at only 50 percent of market value on the banks’ books. Interestingly, those same Basel I and Basel II rules valued government bonds and mortgage backed securities (“MBS”) as “tier one” assets. As such, they were counted at 100 percent of face value. Recall that a substantial percentage of MBS lost all or most their value after the financial crisis of 2008. Today, many sovereign-debt securities (e.g., those of Greece, and perhaps those of Spain and Italy) are worth only “pennies on the dollar.”
