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Fed Considers Reclassification of Gold Bullion - Demand to Soar




 


 

Fed calls for reclassification of gold bullion from 50% to 100% weighting - causing demand to rise much more than previously forecasted.





Paul 0. Martin
Senior Staff Writer
Email: Paul0Martin@att.net

ATLANTA - The Central Bank of the US Federal Reserve released a memo on June 18th calling for the reclassification of gold bullion from 50% to 100% weighting.  At present, gold bullion is only valued or "weighted" at 50% because its value increases and decreases as it is traded around the world. 

At present, gold bullion is only valued or "weighted" at 50% because its value increases and decreases as it is traded worldwide.   The move would give gold bullion the same 100% value as all other financial investments causing a much greater demand for the metal.

This move would only apply to the weighting of gold here in the US only.  Other countries would continue 50% weighting.

 

More On the Fed's Move from Mr. Michael Lombardi, MBA:
The Bank of International Settlements (BIS) proposing to reclassify gold bullion as the safest and the highest quality of asset for central banks and all other banks around the world: Tier 1 capital.

Regardless of how the central banks wish to classify gold bullion, it is the market that will eventually decide the value of gold bullion, which has retained its value and played a significant role as a monetary asset for 5,000 years.

The central bank in the U.S.—the Federal Reserve—has recently released a memo to possibly change the status of gold bullion in this country. (Source: Federal Deposit Insurance Corporation, June 18, 2012)

Currently in the U.S. and in many parts of the world, gold bullion is classified as a risk asset on which banks are allowed a 50% weighting. This means that for every $1.00 of gold bullion held, $0.50 worth is recognized as value on the books of the banks or central banks. The whole $1.00 is not recognized, because there is a risk, according to the classification, that gold bullion could lose its value rapidly.

Again, these are classifications created by central banks and have no bearing on the true value that the market will place on gold bullion.

Still, it is significant that the U.S. is proposing to reclassify gold bullion as a zero-risk asset, as early as January 1, 2013. This means that gold bullion will join the very short list of assets considered zero-risk by the Federal Reserve: U.S. Treasuries; U.S. dollar; and assets and/or claims with the International Monetary Fund.

*** So the central bank of the U.S. has joined the BIS in raising the status of gold bullion. Should the reclassifications indeed be instituted in 2013, it should increase demand for gold bullion by the banks here in the U.S., as gold bullion would be worth dollar-for-dollar on the balance sheet what a particular bank paid for it.

Furthermore, there is new legislation for banks around the world with Basel III. Basel III requires banks to increase their holdings of Tier 1 capital. If gold bullion is reclassified as Tier 1, then the banks can now use gold bullion as a diversification from other assets on their balance sheets.

Central banks around the world are taking steps to reclassify gold bullion to the status that is has held for 5,000 years: money. The proposed and very significant change by the Federal Reserve here in the U.S. should increase the demand for gold bullion and subsequently the price for the yellow metal.

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