Gold is as Good as Cash...Again

The new Basel III Accord is set to take effect early next year. BASEL III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11.

In the new Accord gold will be promoted to tier 1 status and carry a zero risk weighting; gold currently carries a risk weighting of 50%.

In response to the new Basel III Accord, a letter was issued by the federal bank regulatory agencies with new rules proposed that would revise the measurement of risk-weighted assets by implementing changes made by the Basel Committee on Banking Supervision (BCBS) to international regulatory capital standards and by implementing aspects of the Dodd-Frank Act.

Under the new proposed rules issued by the federal bank regulatory agencies, gold bullion will also carry a zero risk weighting as it has been proposed in Basel III.

In short, that means banks will be allowed to carry gold and consider them tier 1 assets, right alongside cash. Basel III also states that banks must increase their tier 1 holdings from 4% to 6%%. That means banks will have to "cash up."

How will the banks increase their tier 1 holdings as currency continues to lose purchasing power?

Last year I mentioned that Switzerland's central bank returned to a profit in the first nine months of 2011 because their gold holdings helped counter losses on their currency reserves.

If you were a bank and had to increase your tier 1 holdings, would you buy gold or currency?

Central Banks around the world have already been hoarding gold. But they've only just begun...