The 300 Club

In the never-ending and important debate over whether gold is money, there is a voice that has recently spoken, and you might want to hear what it said. Many voices worth listening to have said gold has no utility. For example, Warren Buffett is famous for saying that we dig gold out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility, he says. Anyone watching from Mars would be scratching their head.

But there is another voice, much more important than Buffett, that has, in the last 6 months, uttered the opposing view. It's not the voice of a newsletter or any analyst or expert, or any one person, although many agree with this voice, including me. It is actually the voice of a group, a club, that has been described as the most exclusive, secretive and powerful club in the world. The New York Times has called them "the secretive panel that establishes global banking rules" - the central banks' central bank. They meet four times a year in a little town called Basel in Switzerland. Edward Jay Epstein did an article on them for Harper's Magazine back in 1983 where he describes their shyness about publicity and the sophistication of their clubhouse. They have a nuclear bomb shelter in the basement, an entire hospital, as well as some 20 miles of subterranean archives. They make the Fed look like a lemonade stand.

It's an important voice. When did it speak and what did it say? Well, they have spoken, with comprehensive new rule sets, "frameworks" they call them, only three times since their inception in 1974. In 1988, they issued Basel I and in 2004 it was Basel II. And now in 2012, they are issuing Basel III. They are men of few words. They issue no binding legislation, but in the banking world, what they say goes. Both Basel I and II took the then fashionable view of what money is - government bonds, mortgage backed securities, cash, etc. Gold was included in what they allow as capital, but as a "tier 3 asset" (not real money), and thus was only allowed to be reserves for loans at just 50% of its market value, much like, say an art collection would be. Since 2004, a lot has changed with all that. Mortgage-anything has become ultra-toxic, major countries are teetering on bond defaults, and the race to debase cash is raging. These developments have moved the Basel Committee to make some changes, but I'll focus on just two here.

The most significant change is moving gold from its tier 3 status to tier 1 capital as 100% loan-backing reserves, the same as cash and bonds. For the first time in 42 years, gold is being brought back into our financial system as money. All the world's banks are now storing this metal, not as some 3rd rate "asset," but as all the world's working capital - its money. So it's not just any voice, it is the ultimate voice on what is money that has spoken. Gold was removed from our system by Nixon in 1971, when he took us off the gold standard by disallowing foreign governments to exchange their dollar reserves for US-held gold. Ironically, they were doing this in great volume because of Washington's lack of fiscal discipline. Now, as gold has appreciated from $35 to $1700 in the unofficial gold standard interim, Washington's lack of fiscal discipline is again an issue, and we are now being forced to recognize gold as official money again.

You probably were not aware of any kind of return to gold as official money, but these Basel III rules are set to go into effect January 1, 2013 and have prompted Brian Hicks to call it "The Secret Return to the Gold Standard." Brian Hicks is the managing editor and chief investment analyst of The Wealth Advisory. In addition, Brian is a contributor to Wealth Daily and Crisis And Opportunity. He has been a keynote speaker at international investment conferences, as well as a guest commentator on the financial television networks, CNBC, and others. Hicks was part of a small minority opinion (including me) years ago, the peak oil nuts, saying that with oil going to a then shocking $70, we were entering a new age of higher oil. This was in the face of the prevailing opinion verbalized best by Steve Forbes when he said that market forces would fix the oil "spike," and we would soon be back to a normal $40. Now we are paying $110 Brent in a really bad global economy. He was right about oil, and so far, he has been right about what is happening with gold.

In his "Secret Return" report, Hicks points out several news reports lately that investors seem to have glazed over. He mentions John Butler, managing director of Deutsche Bank of London, saying "In what might be the most under-reported financial story of the year" we are seeing an "important step in the re-monetization of gold." Reuters, he says, has quietly reported that "Banks are already preparing for the full implementation of gold's dominance as the new first class security for banking." The Basel Committee is not alone in this new trend to re-monetize gold. Major brokerage firms such as JP Morgan have started accepting gold as collateral in a role typically filled with Treasuries or their equal. Even back in February, 2011, when the Basel move was just being whispered about, The Wall Street Journal online ran a story J.P. Morgan Will Accept Gold As Type Of Collateral; the lead sentence was: "Gold hasn't reinvented itself as a currency yet. But it is getting closer."

However, there are those who are buzz-killing the possible effect of Basel III on gold, such as Jon Nadler, Senior Metals Analyst at Kitco. At his blog, In The Lead, he recently wrote an opinion, "In The Lead - Basel Bull", where he calls on Jeff Christian's CPM Group to explain how the tier 1 change will not induce more gold buying by the banks:

Much hard money newsletter noise has recently been made about gold and its role in the international banking system. The focus by the writers has mostly been on central bank purchases and on the putative Tier One asset status to be conferred upon gold by the Basel Committee. Well, not all is what it appears to be. Central bank purchases have not been overly large compared to historical levels seen in recent years and the massive gold purchases that certain banks are envisioned as making immediately in the wake of gold's attaining Tier One status are simply wishful thinking. But, hey, don't take our word(s) for the above. Let's look at a cogent take on these matters by the good folks over at CPM Group New York.

In their May 31 Market Alert, the researchers at CPM bravely expose certain myths and misconceptions surrounding gold and banks -central or otherwise- as follows:

There is an aura of desperation in the internet gold press, as those who still expect gold prices to rise grasp for any-thing that could be interpreted as being potentially bullish for gold. The collapse of the euro, a stock market crash, a Chinese 'recession,' and other potential catastrophes are pointed to with glee. Other potential developments within the gold market are being trotted forth by gold marketing groups as reasons to believe gold prices inexorably must rise sharply...

As for the Basel Committee's re-rating of gold, CPM Group reminds us that "First, one must point out that it is not at all clear that the Basel Committee on Bank Supervision, which sets these guidelines, will re-rate gold. Even if it did, the purpose on the part of commercial banks in seeking this change is not to allow them to buy more gold. They want to use their existing gold deposits - deposits their clients have made with them of gold - as Tier One assets for the purpose of meeting the tighter liquidity ratios. They are not planning to buy more gold. It would be highly unlikely that any bank would purchase any gold, transferring funds to gold from currencies."

The CPM Group is a respected authority on commodities in general. While not being outright bearish on gold, they are viewed by gold bulls as an official wet blanket that has been dragged kicking and recanting all the way along gold's bull market so far. In fact many use CPM Group's forecasts as a contrarian indicator. For example, Jesse's Cafe Americain, a popular gold website, responded on March 27, 2012, when CPM projected flat gold prices for the next of couple years:

In one of the more bullish developments for precious metals, the CPM group has announced that 'The Top' is in gold (Jeff Christian and CPM Calls 'The Top' In Gold), Given their track record in forecasting the metals, this is rather bullish.

Both Nadler and Christian got put on a roster with Dennis Gartman recently in the unflattering piece titled "Grandich vs. "The Three Stooges of Gold Forecasting" - Gartman, Nadler, and Christian". munkee.com had this to say about that unpleasantness:

The fight started last Wednesday when Peter Grandich, the well-known goldbug and author of The Grandich Letter, wrote a scathing missive that called out fellow investment newsletter writer Dennis Gartman on his assertion earlier this week that gold is now entering a bear market ... as reported in an article by Bloomberg entitled Death of Gold Bull Market Seen by Gartman: