ratseal: (Discussion Rat)
[personal profile] ratseal
Some of my family members are 'gold bugs' (see the wiki entry on that for some easy definitions). I'm not, particularly. However, gold is one of those interesting alternatives (not a replacement) to fiat currencies.

(tl;dr - gold prices just fell, in part because of changes to Basel 3. However, gold prices will not be indefinitely depressed by the governments that control reserve currencies. Gold at $2000/oz was no bargain. Gold at half that price might be.)

Gold prices rarely vary by dramatic amounts on the basis of how gold is used functionally, in other words - gold prices won't go up or down because businesses or governments are consuming or making stuff from it. Rather, gold prices react on the basis of how people and governments FEEL about certain issues, such as inflation.

Typically, investors move into gold when it appears that governments are about to decrease the value of currency denominated assets by printing ('making') money. They might move into gold if they think that there is great uncertainty due to market conditions other than inflation. So, to be clear, the first great driver of gold price is the fear (a feeling) that governments will deliberately decrease the value of certain assets (which are denominated in national currency). The second driver is fear that government incompetence in the face of market forces will decrease the value of certain assets.

Enter the International Bank of Settlements (IBS). Most people have never even heard of it. All bankers have. This organization is the clearing house for big banks and governments. When you see a report that such and such country or bank owes another x billions of dollars (or sterling, or euros or yen) the transaction is nearly always processed through them, using one of the reserve currencies, usually the dollar. To put it another way, your checkbook has the name of your bank on every check - the checkbooks of a big bank like Citi or Barclays etc. have the name of the IBS on them. It is in the interest of big governments and big businesses for these transactions to be currency based. If gold becomes an accepted way to transfer value, then the leverage of national governments is lessened.

Basel 3 is the third round of talks and agreements on how countries and big banks agree to behave in a financial sense. One big piece of this is what banks and countries may list as liquid assets, or stuff that they can turn into cash to pay debts. The transactions for these debts most often flow through the IBS. There are rules on what is a permissible ratio of liquid assets to debt, which drives how much you can borrow (if you are a big bank - this in turn limits leverage. I know this gets boring, but it is critical stuff if you are a banker or a national economist).


Guess which asset is NO longer permitted to be counted as a liquid asset for Basel 3? Gold. You want to count some low quality bonds? Not a problem. Precious metal outside the span of control of governments? Not allowed.

Now will this stand? Remember the two primary drivers of gold price (according to me, anyway)? Well, the new Basel 3 rules affects the first. The second one remains relevant. Who is buying gold now? Governments, especially ones that don't control a reserve currency (reads: China).

I think that gold may fall some more in the very near term, but will climb significantly later. The timing isn't certain - but the incompetence of the government economists and the avarice of bankers is.


See: http://www.forbes.com/sites/greatspeculations/2013/04/17/gold-will-get-the-last-laugh-on-central-banks/

Date: 2013-04-17 04:44 pm (UTC)
From: [identity profile] gwendally.livejournal.com
So eloquent an explanation! May I link to it from Facebook using my real name? (and if that is okay would you mind if I deleted this comment, or have you hide it?)

Date: 2013-04-17 10:34 pm (UTC)
From: [identity profile] ratseal.livejournal.com
You are welcome to it, and by all means delete as you see fit.

Since this journal is only viewable by friends I'll go back and make this post public. Or - you could copy and paste and attribute to 'a LJ friend', whichever you prefer.
Edited Date: 2013-04-17 10:43 pm (UTC)

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