The Strange Case of BIS and Gold
The Bank of International Settlements, or BIS, headquartered in Basel, Switzerland, is known as the central bank for central banks. It’s one of the most powerful institutions you’ve likely never heard of. Founded in 1930, its mission is to ensure international monetary and financial stability. So, the question arises…why has the BIS snubbed gold, one the best performing assets of this century?
One of its responsibilities is to ensure that banks have enough protection available to deal with any crisis that might erupt. That means having a sufficient amount of liquid assets on hand, assets that can be depended upon to maintain their value under even the most tumultuous circumstances. Defining such assets is an important part of what BIS does. U.S. Treasury bills are always a big part of the mix. Other highly liquid assets include AAA-rated sovereign debt.
The catastrophic 2008-2009 financial crisis had made it obvious that BIS needed to raise the standards relating to liquidity to forestall any repetition of that financial meltdown. During the worst of that crisis, banks were left so high and dry that General Electric nearly missed a payroll because it did not have access to enough liquidity. Specifically, BIS set out to ensure that banks would have a buffer large enough to cover net bank withdrawals over an extremely stressful 30-day period. It issued its new guidelines, known as Basel III, in 2013.
It had been widely assumed that BIS would include gold as a financial asset banks could use to constitute part of their liquidity. But amazingly, when BIS issued its recommendations (the guidelines are voluntary, but banks take them very seriously), gold was nowhere to be found. What was on the list? Acceptable forms of liquidity included sovereign debt, common stocks, and BBB+ bonds (some with a haircut, i.e., at less than full face value).
What Did We Learn From the Great Recession… If Anything?
That decision to snub gold in 2013 was extraordinary. On any logical grounds, omitting gold made no sense, given gold’s outstanding performance during the worst of times in this century’s first decade. Between the start of the Great Recession on September 30, 2007 through March 6, 2009, when the market bottomed, gold gained 26 percent. That left every other asset in the dust. Only long-dated U.S. Treasuries came close. Germany’s 30-year note lost about 20 percent, while Britain’s 20-year bond lost about 40 percent. The S&P 500 lost over 55 percent. Furthermore, only U.S. bonds were less volatile than gold.
In other words, by any objective measure, gold would have been far and away the most suitable liquidity buffer of all. Yet BIS left it out entirely in favor of common stocks and mediocre bonds. BIS’s actions contributed to gold sinking from $1,800 an ounce in October 2012 to below $1,200 by the end of June 2013, a 35 percent plunge in a mere eight months. The downtrend continued until the end of 2015, when gold briefly traded below $1,050.
BIS’s inexplicable decision to ignore gold only makes sense when you realize how desperate Western financial elites have been to prevent gold from being recognized as a currency. If gold resumed a role as an acknowledged currency, central bankers in the U.S. and Europe could no longer control monetary policy by printing money, as the U.S. Federal Reserve did through its quantitative easing program. Printing more dollars, or more of any paper currency, would simply make that currency ever less valuable relative to the one currency of which there was a fixed amount, i.e., gold.
Gold’s value would rise in proportion to the amount of paper money that was newly printed. In the most extreme case, that money would literally be worth only the paper it was printed on. Goods and services would be denominated in gold, and printing more money would resemble a dog chasing its tail. Control of the economy would pass to whoever held the most gold, blowing apart the world economy’s monetary foundations.
Want to read more? This is an excerpt from my latest book ‘China’s Rise and the New Age of Gold’. Check out the Amazon Kindle free digital preview or purchase the traditional hard cover copy on Amazon.com
China’s Rise and the New Age of Gold
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