Tags: Banks | Gold | buying | global

Banks Across the World Catching Gold Fever

By Tuesday, 31 July 2012 04:42 PM Current | Bio | Archive

The world’s central banks have purchased a net 1,290 tonnes of gold since the fourth quarter of 2008, not counting purchases by China and other countries that don’t regularly report import purchases or purchases of their own domestic production.

The World Gold Council (WGC) reports that central bank gold buying exploded by 470 percent in 2011. The council is so confident that central banks will continue to buy gold that it has added official-sector purchases as a new component of its gold-demand reporting.

Now private banks want to get into the act of accumulating gold, though in a different way. Efforts by governments to lure the gold hoards of private citizens out of hiding are making it enticing for private banks to offer gold-deposit accounts to their customers.

Turkey’s commercial banks are muscling in on the jewelry trade’s territory by aggressively encouraging customers to deposit their gold in a bank instead of trading it at the Grand Bazaar. Customers who open gold deposit accounts can withdraw it either in gold bars or in Turkish liras. The accounts pay interest that is lower than normal time deposits.

Gold-deposit accounts have been catching on around the world, but Turkey is considered a leader in the trend.

The banks’ interest in gold comes as a result of changes in reserve requirements initiated last September by Turkey’s central bank. One indication of the banks’ marketing impact on the jewelry trade comes from a banking watchdog group’s report that total gold deposits in Turkish banks in April zoomed more than fourfold from a year ago. The WGC ranks Turkey’s gold demand fifth in the world for jewelry and eighth for investment.

In the United States, banks may get an incentive to hold gold in their vaults instead of dollars. In a potential game changer, bank regulators could soon deem gold as good as cash, when held in a bank.

A memorandum for comment issued by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve is seeking comment from bankers on a move that would place a “zero-percent-risk weight” rating on gold bullion if held in a bank.

The specific wording establishes a “zero percent risk” to either cash or “gold bullion held in the banking organization’s own vaults or held in another depository institution’s vaults on an allocated basis… .” This places gold on the same risk level as cash, a move that could increase gold demand among conservative investors, as well as banks.

This move, if adopted, could cause more banks to invest in gold to dress up their own balance sheets. U.S. Treasury bill rates are so low that many bankers will ask, “Why not hold at least 10 percent in gold, giving us the chance to earn a lot more than 1 percent per year in a ‘currency’ that no government can inflate?

Currently, gold has a 50 percent risk weighting, meaning that banks are only credited with 50 percent of gold’s value on their books, say $800 per ounce, not $1600 per ounce. Meanwhile, government bonds are given 100 percent value on bank books, since they carry “zero” risk. In the real world, of course, every investment carries risk.

If this provision passes, it would not take effect until Jan. 1, 2013, but a move to the new regulation could increase gold demand by both banks and traditional savers, possibly pushing gold over $2,000 per ounce and creating a virtuous circle of demand increasing prices, which, in turn, increases demand and typically increases the number of gold-coin buyers. In the process, we will take one more step toward a “virtual gold standard,” not a sudden change of religion by central bankers, but a way for more and more average people to consider gold as a part of their safe hoard of core savings.

What this possible new banking regulation means, in practical terms, is that individuals who hold gold in their bank account might soon be able to take out a bank loan using nearly 100 percent of their gold’s market value as collateral.

If the trend continues, the WGC might need to add another category to its gold demand reports.

About the Author: Mike Fuljenz

Mike Fuljenz is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the NLG award winning Michael Fuljenz Metals Market Weekly Report.  Discover more by Clicking Here Now.

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Tuesday, 31 July 2012 04:42 PM
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