Last week Dr. Alex Cowie wrote to you about the potential for retail banks to become big owners of gold.
The Basel Committee on banking is due to discuss a plan that would allow banks to carry gold at full market value on their books, rather than 50% of the value, as they do under current rules.
If that plan goes ahead it could create a big demand for gold and even see the price rise to USD$2,000, USD$3,000 or more.
Well, before you get too excited about that happening just yet, the banks have another plan. It’s the exact opposite of adding gold to the balance sheet. And it could mean even better news for gold owners…
This week the Financial Times reported:
‘Several US banks want to tap the value of the intellectual property holdings of their borrowers as a way of trimming their capital requirements, which are to be made tougher under Basel III rules.’
In other words, it seems the banks aren’t quite so serious about shoring up their balance sheets by adding something tangible to the books. They would rather go the other way.
That shouldn’t surprise you.
Given the choice between reality and fiction, banks would rather go for the latter.
The global banking crisis exposed differences in asset quality. Plant, property, equipment and gold have tangible value. Intangible assets (derivatives and intellectual property) are harder to value.
But if banks want to find a way to expand lending, they will have to find a way to unlock these intangible assets and add them to the balance sheet.
Besides, the market prices gold. So it’s hard (but not impossible) for one bank to influence the gold price in its favour.
In contrast, it’s easy to influence the value of an intangible asset…especially when the bank values its own assets. With the help of an ‘independent’ auditor of course.
So it isn’t a surprise to learn that banks are trying to improve their capital position without actually improving their capital position.
And if you line it up with the recent news of JPMorgan Chase & Co’s [NYSE: JPM] USD$2 billion loss on bad trades, it tells you the banks have learned nothing and learned everything at the same time.
Yesterday JPMorgan chief, Jamie Dimon said, ‘This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks. We have let a lot of people down, and we are sorry for it.’
Not as sorry as the taxpayer will be when more of these big bank bets go bad. And they’re bound to go bad. Because as we say, the banks and bankers have learned nothing and learned everything.
JPMorgan’s bets were so big in some markets that JPMorgan couldn’t trade without moving the price.
What the Bankers Don’t Want You to Know
But yesterday, the CEO of hedge fund, Blackstone Group [NYSE: BX], Stephen A. Schwarzman told Bloomberg News, ‘Occasional losses are inevitable. Publicly excoriating JPMorgan serves no purpose except to reduce people’s confidence in the financial system.’
In other words, ‘Shut up, what the plebs don’t know won’t hurt them.’
The banks have learned they can go to amazing lengths and take huge risks, knowing that governments and central banks will bail them out if anything goes wrong.
This behaviour supposedly ended in 2008. Only it didn’t. Spanish bank, Bankia is the latest to get a government bailout. It’s perhaps a fluke that Bankia’s Madrid HQ has a unique…but appropriate design:
Falling Bank
But whether the banks get their way about using intangible assets as collateral doesn’t matter. Because they already use intangible assets – for instance, government bonds.
So what it tells us is the bankers will go to amazing lengths to prevent their bank from failing. Even though they have a government bailout as a back-stop, that’s a last resort.
The aim is to walk as close to the line as possible, without crossing it. But when so many banks are doing the same thing, in an effort to keep ahead of the competition, some will cross the line…
Lehman Brothers, Merrill Lynch, Washington Mutual, Royal Bank of Scotland, Northern Rock (UK), Hypo Real Estate (Germany), and in Australia, BankWest.
Some of those collapsed. There were some takeovers. Others received direct government bailouts. And that’s not the full list.
The bottom line is this: everything you read or hear about governments and central banks creating solutions to combat the global economic crisis is just a temporary fix.
It’s a fix to last just until the next problem crops up. Although in reality, the ‘fix’ usually creates the next problem.
The Latest Crisis Solution Plan
Last week the following headline caught our attention, ‘European Shares to Open Higher; G7 Agrees to Act’.
The article said:
‘European shares were called to open higher on Wednesday after finance ministers from the G7 major economies discussed progress toward financial and fiscal union in Europe in an emergency call on Tuesday and agreed to work together to deal with problems in Spain and Greece…’
Great news, right? Not so fast. We did a bit of research and came up with the following headlines from the past four years:
6 April 2008 – ‘G7 rescue plan dominates investors’ – Reuters22 September 2008 – ‘Banking crisis: G7 nations approve US rescue plan’ – the Guardian
11 October 2008 – ‘G7 agrees global rescue plan’ – the Guardian
9 May 2010 – ‘Central banks back European rescue plan’ – Globe & Mail
13 September 2011 – ‘BRICs rescue plan beginning to take shape’ – Globe & Mail
15 February 2012 – ‘EU debt crisis: China to the rescue’ – Financial Post
21 February 2012 – ‘Europe seals new Greek bailout but doubts remain’ – Reuters
31 January 2012 – ‘EU agrees permanent rescue fund…’ – Merco Press
See what we mean? One crisis leads to another…and another.
It creates volatility and a lot of doubt for investors.
Better News for Gold Owners
Now, we can’t say for certain when the economic endgame will arrive. That’s the point when the system is so distorted and grotesque, even a temporary fix won’t work.
But what we can say is it could happen at any point. Long term, the banking system will need to revert to a gold-based or gold-backed system. But the banks won’t let it happen without a fight.
When it happens it will be good news for gold owners. But before that, ongoing market instability and printing trillions of dollars, euros and yen should be even better news for gold owners.
Some say that gold looks expensive at USD$1,610 per ounce. But unless you believe governments and central bankers can really solve the global economic problems, there’s no doubt that the gold price will go much higher.
Despite the seemingly high price, now is a good time to buy gold.
Cheers,
Kris.
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