Gold Re-Monetization Is Much Closer Than Many Realize

Monetary policy is largely responsible for the market conditions we have today. Whether we like it or not, central planning in the capital markets will remain with us for the foreseeable future. Capital flows will be as much a function of market fundamentals as they are of policy. This is very true for gold. Gold was formally de-monetized in 1978 with the Jamaica Accord. It is now being re-monetized. This paper aims to answer the questions of how and why.

Gold Re-Monetization Is Much Closer Than Many Realize | BMG Group Inc.Serious players in the world of finance are acquiring enormous sums of physical gold. In the last quarter alone (Q3 2018), central banks added 148 metric tonnes of physical gold to their reserves.

February 2018 marked a major turning point for gold –monetary gold to be more specific – when the Swiss National Pension Fund switched out of synthetic gold derivates into physical gold. Monetary gold is defined, in the new Basel III banking capital rules, as “physical gold held in their own vaults or in trust.”

The Swiss decision complied with the new banking standards regarding capital adequacy as it relates to solvency and viability. All Systemically Important Financial Institutions (SIFI) must comply with the new rules for Net Stable Funding Ratio (NSF) and Liquidity by January 2019. Lessons learned from the last liquidity crisis, when Lehman Brothers nearly caused a global financial meltdown, forced a rethink in how assets held on an institution’s balance sheet are to be valued. Counterparty risk became extremely important again. In short, when trust between SIFIs fails, liquidity dries up as lending ceases due to solvency fears. The need for liquidity was a key change in the creation of the new standards, and it shone a spotlight on an asset that had largely been ignored for this purpose – physical gold.

The gold market is bigger than all financial markets – exceeded only by bond and money markets. A point to consider here is that gold is not traded at the commodity desks of large banks. It is traded at the currency desks. And a  staggering $250 billion worth of gold changes hands on a daily basis via the London Metals Exchange.

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