Wednesday 6 June 2012

The NZ Reserve Bank's Position on Gold

With many thanks to the Gold Survival Guide.



How the Bankers could be brewing up a game changer for the gold market

...and the idiots who guide NZ's economy

6 June, 2012
Probably the most important article we read elsewhere during the week was this run down on the significance of how the Basel Committee for Bank Supervision, who create the rules that govern banks, are looking at turning gold into a 'Tier One' asset. 
Banking capital adequacy ratios, once the domain of banking specialists are set to become centre stage for the gold market as well as the wider economy. In response to the global banking crisis the rules are to be tightened in terms of the assets that banks must hold and this is potentially going to very much favour gold. The Basel Committee for Bank Supervision (or BCBS) as part of the BIS are arguably the highest authority in banking supervision and it is their role to define capital requirements through the forthcoming Basel III rules. 
In short, they are meeting to consider making gold a Tier 1 asset for commercial banks with 100% weighting rather than a Tier 3 asset with just a 50% risk weighting as it does today. At the same time they are set to increase the amount of capital banks must set aside as well. A double win potentially. 
Hitherto banks have been much dis-incentivised to hold gold while being encouraged to hold arguably riskier assets such as equity capital, currencies and debt instruments, none of which have fared too well in the crisis. With this potential change in capital adequacy requirements. bank purchases of gold would drive up its value relative to other high quality qualifying assets, increasing its desirability for regulatory purposes further. This should result in gold being re-priced to bring it on a par with all other high quality assets."
The article goes on to outline just how big an impact this change could have on the price of gold.  You already know our views that gold is money but this would in effect mean the banks agreeing with the likes of us, as this change means instead of banks only being able to value gold they hold at 50% of its market value they can now value it at 100%.  It could be a significant step in the return of gold to the monetary system (although we’d rather not have the bankers deciding on this as anything they come up with is sure to still be advantageous to them).

Central Banks buying gold big time
Interestingly many of the nations who are on the BCBS are the very nations who have been buying gold of late such as Turkey, Mexico, Russia, and China.  So it would be in their interests to raise the importance of gold.  
Specifically the latest reported figures for Central Bank purchases in March and April include:
Phillipines 32 tonnes
Sri Lanka 2.177 tonnes
Turkey 29.7 tonnes
Mexico 2.92 tonnes
Kazakhstan 2.02 tonnes
Ukraine 1.4 tonnes
China doesn’t report its holdings to the IMF very often but just reported 2 days ago was that in April 101,758 kgs of gold were shipped to mainland China from Hong Kong.  
So the odds are a fair chunk of this may have ended up in Central Bank coffers.  This was “up 62% on the previous month and marking the second-highest monthly exports.”
This will help to make up for the fact that India is importing less and likely to be significantly less for the year overall.

Gold not liquid enough for the RBNZ
It seems our Reserve Bank of New Zealand doesn’t agree with the Bank of International Settlements or these other central banks on gold though.
We’ve written previously how the RBNZ doesn’t hold any gold and how they might want to consider exchanging some of their foreign currency reserves for gold.   
Reader Jake was kind enough to forward us on an email just received from the RBNZ in response to his question on whether they had or intended to buy any gold.
As Jake put it, “here is their response just for your entertainment:”

Dear Jake
Thank you for your question and apologies for the delay in responding.
The Reserve Bank of New Zealand has not held any gold reserves since 1991.
Our reserves management responsibilities are set out in the Reserve Bank Act of 1989 and our foreign reserve targets are specified by the Minister of Finance. The Reserve Bank is not, at this stage, planning to include gold in our foreign reserve portfolio. The Reserve Bank’s position is that gold does not meet our liquidity requirements.
Kind regards
Raewyn Peters
Knowledge Adviser | Reserve Bank of New Zealand
2 The Terrace, Wellington 6011 | P O Box 2498, Wellington 6140
T. +64 4 472 2029 | F. +64 4 471 3722

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