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News: Regulators to Classify Gold as Zero-Risk Asset

In what might be the most underreported financial story of the year, US banking regulators recently circulated a memorandum for comment, including proposed adjustments to current regulatory capital risk-weightings for various assets. For the first time, unencumbered gold bullion is to be classified as zero risk, in line with dollar cash, US Treasuries and other explicitly government-guaranteed assets. If implemented, this will be an important step in the re-monetisation of gold and, other factors equal, should be strongly supportive of the gold price, both outright and relative to that for government bonds, the primary beneficiaries of the most recent flight to safety. Stay tuned.
Did Anyone Notice?

In an Amphora Report last month, The Canary in the Gold Mine, I made the case that 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 US Treasuries, German Bunds and British gilts, are zero-risk-weighted.

However, in the report, I speculated that perhaps that would change in future, and that:


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Of course "zero risk" is used

Of course "zero risk" is used here as a regulatory term, not a real life description. A Treasury bond is "zero risk" in that its interest and principal will be paid. The government will print the money if necessary. Of course there is a real world risk that the dollars you get back will buy a lot less than the dollars you invested.

Gold can't be printed so there is no risk that its value will plunge by, say, 95% (as can happen to fiat currency during hyperinflation). And there is no counter party risk to physical gold. But the price can certainly go down. Anyone who bought gold when it spiked up above $1800 is certainly aware that gold can lose significant value in the short run.

I don't believe there is such a thing as a "zero-risk asset",

but I'd say gold is less risky than a politician's promise, which is all that backs a government guarantee.