Shed a little light on Gold: The Remonetization

This video does a great job at explaining the basic structure of the worlds major banks.

The real topic of discussion in this post will be Tier 1 Capital. First and foremost, what is Tier 1 Capital and what is its purpose?

The 1st Tier of capital in the major banking industry (banks typically valued at $50Billion or more) is esentially the beating heart of the bank itself. It is composed of assets that are regarded as having a zero percent risk weight. Meaning that they are of no liability, and can be counted on no matter what the economic landscape. The purpose of these capital reserves are to protect the bank from possible collapse during times of great distress, like the large financial collapse of 2007 and 2008 where we saw many large institutions come under serious pressure do to over leveraging and inadequate capital reserves.

Now that we have defined Tier 1 capital and we understand its purpose lets ask ourselves... what should qualify as a zero risk asset?

Typically the banks own shares of common stock and retained earnings are the heavy hitters. They account for a good portion of the reserve capital. Also allowed into this select category are government guaranteed debt instruments like treasury bonds, and possibly common shares of other institutions. When you think about the term "zero risk" some of these assets simply dont seem to fit the bill, especially under current keynesian monetary policies. With governments around the world expanding their currency supplies at alarming rates it seems negligent to assume that bonds, with such small yields, would be viewed as a "safe haven" asset class as their returns are mostly below the rate of inflation. Anyone that can perform basic mathematics can see that most of these governments have very little to no chance of repaying their debts without first inflating their currency supply to make their payments bearable. So the options for these treasury holders are limited, esentially, to either being repayed with devalued currency (at a loss), or not being repayed at all; hardly what i would call a "zero risk" asset.
On the other hand you have an asset like Gold which has proven over nearly 5000 years of history that it is the ultimate in stability. It has no counterparty risk, it cannot be manipulated or reproduced and most importantly it tends to outperform all other asset classes in times of great inflation, deflation, and distress because of its "zero risk", "safe haven" properties. Gold seems to fit all of the requirements for tier 1 capital and yet it is viewed, in the banking industry, as unequal to currencies and government debt. In fact, within Basel II standards, it remains in the 3rd tier of capital which is home to the most risky assets.

So why isnt gold used, in the world wide banking system, as tier 1 capital if it is exactly what they need in times like these?

This is a great question and the answer is fairly obvious once revealed.
There has actually been talk within the banking industry about the possible shift of gold to a tier 1 asset. You see, banks would actually benefit from the change, as the Basel Committee on Banking Supervision (BCBS) is forcing them to increase their percentage of tier 1 capital starting January 1, 2013 to create more stability in wake of the 2008 crisis. Having other options would allow them to more easily fill the added requirements.
The reason that its so difficult for the committee to allow gold into the tier 1 class is that it would seriously undermine the governments ability to sell their debts. As mentioned earlier, anyone with a calculator can figure out that the bonds have negative returns while gold is only increasing in value with every dollar, euro, yen, etc printed. The banks would without doubt begin to diversify more of their holdings out of bonds and currencies and into gold, so the governments really won't take a change like that sitting down. It may be forced upon them though as gold continues to incrimentally enter the system from the peripherals.
Central Banks have become net gold buyers for the first time in years, and that really makes a bold statement. In the eastern hemisphere we're even seeing the chinese government encouraging its citizens to purchase metals. Many nations are beginning to diversify more and more of their holdings out of dollars and into commodities, as well as creating trade agreements which do not involve converting currency into dollars for purchases. We've seen the acceptance of gold to settle debts on many occasions and its becoming more obvious that people dont want to continue holding and accepting currencies that are being continually debased. So we can see that people are starting to understand the situation more fully as the problems only seem to compound and the fundamentals for precious metals continue to improve. Gold will ultimately move back towards the center of the financial system where it belongs, whether its voluntary or forced doesnt seem to matter.

Prudential has a Great Point!

Prudential's Silitch today said that with bond yields so low a loss of investor interest could be a real possibility. More importantly he noted something I've believed for a while now and that i first heard from Peter Schiff; if interest rates are for any reason forced upward, whether in an effort to curb inflation or something else, the prices of real estate could take a major hit.
You see the fair market value on a piece of property consists of two major parts, the actual property value and then the amount of the interest on the loan. So say that the average single family home is worth $250,000; that is what people are willing to pay for that piece of property. That number is the total loan amount which is the price of the home plus the interest. Now if interest rates suddenly climbed from near zero to 5% or 10% the price that someone is willing to pay for that house will not necessarily change. Which means that the interest portion of the loan has increased so the value of the home must theoretically decrease to compensate.

Total Loan Amount = Interest + Home Price

Another thing to note is that even if property does begin to rise in price, it may be falling in value.
Price is a unit of measure using the US Dollar, while Value is measured against other assets.
The price may rise simply because they are printing so much currency, but when you measure the gains against those of gold or cotton or oil, etc you will find the actual value of the asset.

Japan follows suit

On September 19th the Bank of Japan announced that it will be following the lead of the ECB and the FED. You can see the "race to debase" as its being called. Governments around the world are all printing money in an effort stimulate their economies and increase growth. Having a currency of less value also means that your exports are more affordable to other nations with more valuable currency, but for those nation with more valued currency exports are more difficult to move out the door. So when some countries are beginning to devalue their currencies at a rapid pace, it forces others to print and devalue as well in an effort to keep competitive in the export markets.
What the governments dont understand about Keynesian style economics is that it never works. If you look back in history at every instance of this type of monetary behavior, they all end very badly.