Why Gold is important
Gold is important because it is the only asset class that is not somebody else’s liability and do not rely on any counterparty to perform. Within the precious metals group, it has been recognised as money since civilisations began using money.
No Counterparty Risk
Shares depend on companies performing (look at Air Asia). Government bonds depend on governments not going bust (look at Greece). Bank deposits depend on banks not going bust (look at Barings).
But gold does not depend on any counterparty to perform. This makes it an valuable investment asset, and an important component of an investment portfolio in times of crisis. The table below summarises the asset classes and their counterparty risk.
Central Banks value it highly
Central banks value it so highly that most major central banks hold 20-40% of their foreign exchange reserves in it. For example, at time of writing the US holds 79% of its reserves in gold, Germany holds 76%, and Italy holds 71%. A list of the top 10 countries with the largest gold reserves can be found here. Extract shown below.
Banking requirements under Basel 3
These qualities make it so important that the Bank for International Settlements (BIS) reclassified it from a Tier 3 asset to a Tier 1 asset for the purposes of Minimum Capital Requirements for banks. This means that it is valued at 100% (“ie. risk weighted at zero percent”) when calculating compliance with minimum capital requirements for a bank. Refer BIS document on Minimum Capital Requirements on Page 26, footnote 32. Extract shown below
Why it is important for banks to own gold
It is important for Central Banks and banks to own gold because… in a crisis they are preparing for an explosive revaluation in the gold price that would bolster their balance sheets and make up for any other devaluation in their other assets! If banks are preparing for this eventuality, don’t you want to also?
Want to know what would be the gold price in the event of a crisis or monetary reset? Find out here
- It is stored outside the banking system protects you against bank failure.
- It is a protection against inflation, currency devaluation and tail risk.
- It is highly liquid and easy to sell if you need it in emergencies.
- It’s price goes up during times of crisis.