On the eve of the implementation of the Basel III capital rules governing the world's largest financial institutions veteran investor Eric Sprott points to gold as the most convenient and over-looked solution to the global banking system's woes.
The Basel Committee on Banking Supervision, responsible for devising guidelines for the world's leading financial institutions, has spent the past four years since the Great Financial Crisis drafting a new set of international banking regulations to prevent the recurrence of similar catastrophes.
The new rules are slated to take effect on 1 January 2013, yet only months prior to their scheduled implementation they have already triggered refractory responses – particularly in the United States, due to their complexity and adverse impact on profits.
In a trenchant essay on the new regulations Sprott highlights what he believes to be one of their chief defects – their treatment of gold as an asset class.
Sprott notes that Basel III regulators cling to the notion that AAA-government securities should comprise the preponderance of high quality liquid assets which banks are required to hold.
Such securities are no longer esteemed by the financial community as safe harbor holdings due to the sovereign risk issues blighting a number of indebted nation-states, as well as the propensity of governments to issue blithely issue debt.
According to Sprott, precious metals such as gold could be the solution to the instability of the global banking system were they conferred with a heightened liquidity profile under the new Basel III framework.
Sprott writes that this would "open the door for gold to compete with cash and government bonds on bank balance sheets – and provide banks with an asset that actually has the chance to appreciate."
Non-Western central banks have already cottoned on to this and included gold as a key component of their foreign exchange reserves, while two banking jurisdictions in particular – Turkey and China – "have openly incorporated gold into their capital structures."
The People's Bank of China recently made remarks which would imply that the government wishes to capitalize on their growing gold stockpile by integrating the domestic market with the international market, and Sprott speculates that China "may have already cornered most of the world's physical gold supply" in anticipation of the day that Western banks realize that the precious metal is preferable to Treasuries.
Image of Eric Sprott courtesy of CaseyResearchFan via Youtube