Is gold safe or dangerous now?

US banking regulators' proposal on risk weighting could boost the precious metal's attraction as an investor haven.

By Wall St. Cheat Sheet Jun 28, 2012 2:04PM

Image: Small Stack of gold ingots (© Anthony Bradshaw/Photographer)By Eric McWhinnie, Wall St. Cheat Sheet


Gold has been called many things over the past several years. The shiny yellow metal is seen as a haven to some, but a barbaric lifeless asset by others. In short, gold has trouble receiving a wide range of support as a key player in the global financial system. 


However, new developments may slowly change how investors and institutions view the precious metal.


Earlier this month, U.S. federal bank regulators issued a proposed rule-making note regarding capital risk-weightings for various assets. The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Reserve asked for comments on a move that would place a "zero-risk-weight" rating on gold bullion held in banking organizations' own vaults, or held in another depository institution's vaults on an allocated basis.


The full note can be found at FDIC.gov and Section 11 on page 57 states, "A zero percent risk weight to cash owned and held in all of a banking organization’s offices or in transit; gold bullion held in the banking organization's own vaults, or held in another depository institution's vaults on an allocated basis to the extent gold bullion assets are offset by gold bullion liabilities; and to exposures that arise from the settlement of cash transactions with a central counterparty where there is no assumption of ongoing counterparty credit risk by the central counterparty after settlement of the trade and associated default fund contributions."


The move will essentially place gold on the same risk level as cold hard cash -- 0%. Historically, gold has received a risk weighting of 50%. If the proposal stands, it appears that banks will have more flexibility and will not have their regulatory capital ratios punished for holding gold as a haven, instead of government bonds or fiat currency. This will likely help gold be seen more as a true haven in financial markets and further drive gold bullion demand, which is already at historic highs among central banks.


John Butler, chief investment officer at Amphora, explains, "A key reason why gold has not been acting like a safe-haven asset in recent months is because banks are so capital impaired that they are scrambling to reduce their holdings of risky assets in favour of so-called 'zero-risk-weighted' assets, against which they needn't set aside any regulatory capital. As it stands, gold has a 50% risk-weighting. But some government bonds, including U.S. Treasuries, German Bunds and British gilts, are zero-risk-weighted." 


Interestingly, Standard and Poor's downgraded the U.S.'s credit rating for the first time ever last year. Wednesday, Egan-Jones credit ratings agency downgraded Germany by one notch from AA- to A+ with a negative watch. The effort to reevaluate the meaning of "zero risk" appears to be long overdue.


While we do not expect the proposal to make gold prices skyrocket overnight if approved, as gold bullion positions will be hedged, it does aid the recognition that gold is an important financial asset that lacks counterparty and downgrade risk, making it the ideal haven. Some of the world's largest and most powerful organizations have already realized this. The Bank for International Settlements, which is basically an international central bank looking over other central banks, recently released its latest annual report. It showed that the BIS reported a profit of Special Drawing Rights 758.9 million. However, about 15% of that profit came from the sale of physical gold and the repayment of gold loans. Apparently, gold is not as lifeless as some may think.


Eric McWhinnie is an editor at Wall St. Cheat Sheet. Disclosure: Long EXK, AG, HL, PHYS.


More from Wall St. Cheat Sheet

Tags: gold
12Comments
Jun 28, 2012 11:48PM
avatar
Gold is a must have more than ever, Silver is a great buy JP Morgan has done a great job in keeping silver down and now if you dont have silver,  buy it and take delivery DO NOT buy paper gold & silver when the dollar crashes you will lose everything..if you cant hold it you dont own it.
Jun 29, 2012 1:45AM
avatar

Johnnny be good be also right. Buy it, hold it - and hide it.  Because if big gov and a re-elected preezy of the steezy find out you have it they might decide to take it to pay for the candy they keep wanting to give away.

 

Fire up themoney printing presses. Greece here we come!

Jun 28, 2012 10:37PM
avatar

He with the Gold wins.

 

Or dies with his Gold.

Jun 29, 2012 10:58AM
avatar
Holding gold or silver in a portfolio may be helpful but I believe we need to hold physical gold. If you are holding it in a portfolio and the company , government,ect goes under you are screwed. If and when the world goes to hell, these metals have been used to barter as coin of the realm for thousands of years. 

Oh yeah lead in the form of bullets would work well in this scenario also.
Jun 29, 2012 8:12AM
avatar
The governments desire to grow and various groups desire to get assistance or handouts won't change anytime soon.  Gold and silver have a big future.
Jun 29, 2012 8:57AM
avatar

Its like I always said "No matter where you go; there you are"

Jun 29, 2012 11:22AM
avatar
People need to the read the paragraph before the quoted passage to understand the premise of what is being asked. Since the link provided does not go there directly here is the link.. http://www.fdic.gov/news/board/2012/2012-06-12_notice_dis-d.pdf. Page 57 Section 11
Jun 29, 2012 10:19AM
avatar
All I can say is it's gonna be a heck of allot be easier to buy barter or trade when we all have a number permanently stamped on our bodies....
Jun 29, 2012 6:41AM
avatar
Gold is a fool's "investment," especially now with prices so high. Mark my words, gold bugs will be greatly disappointed in coming years as the economy improves. Five years from now, the price could be half what it is now, or less. Gold is for the gutless investor who only knows how to live in fear.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

118
118 rated 1
270
270 rated 2
472
472 rated 3
714
714 rated 4
624
624 rated 5
608
608 rated 6
623
623 rated 7
445
445 rated 8
319
319 rated 9
125
125 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
BIDUBAIDU Inc10
BMYBRISTOL-MYERS SQUIBB CO.10
CELGCELGENE CORP10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.