One of our favorite and most respected gold commentators, Ben Davies has released a sequel to a piece he wrote in 2011: Revolting PIIGS. Davies discusses financial repression, the PIIGS debt crisis, and how gold relates to these issues.
From Ben Davies:
Gold has had a risk weighting of 50%, meaning an institution had to adjust its capital by 50% and then based on capital adequacy ratios mentioned below make appropriate reserve provisions. So if you had £4bn gold the institution has to provide capital as a proportion of only £2bn. Recent developments in the US suggest that gold may actually be offered the luxury of this very same subsidy given to sovereign debt. I originally didn’t mention it because I genuinely believed it was an unlikely event that gold could be considered a risk free asset and likewise eligible as collateral, as it flies in the face of financial repression tactics; sorry surely I mean macro-prudential regulation.
Financial repression in this case refers to the coercion of the private sector to take on more sovereign debt. For example in 2009 the FSA enforced higher capital charges and take up of over £90bn of UK debt onto bank and UK based foreign bank branches.
This recent gold risk weighing development has garnered very little attention, yet it could affect a significant change in understanding and application of gold within our current money system. [Read more...]