One of the funniest canards about gold, besides “you can’t eat it,” of course, is that gold does not earn interest. We have an entire article on bullion bank gold leasing, but earning interest on gold is not just for the big players. Just like anything lent out, it is done at a price. In many countries, banks will pay you to allow them to hold your gold. Many are leery of the idea of trusting institutions that are prone to having their front doors locked with one’s life savings trapped on the other side, yet the amount of gold on deposit at one Turkish bank was reported as growing at 8% a month.
In Vietnam, commercial banks pay locals interest to their store gold as well; however as the Dow Jones reported, the Vietnamese banks promptly turned around and sold the gold to boost their cash reserves. Now some banks there have a deficit of gold, despite having purchased more than 80 tons over the past seven months, according to Deputy Central Bank Governor Le Minh Hung. Many people are skeptical of handing over gold and silver in exchange for interest payments that are created by the banks out of thin air.
Increasingly this is the case in Turkey, as in the example of Ayten Altin, the 70-year-old housewife in Istanbul, who explained last summer that she is “keen to save, so keeping gold at home is easy for me; there is no complicated procedure. In an emergency, I can convert it to cash, and I don't have to wait for the bank to say the asset has matured.”
In Turkey, the country’s largest lender offers gold-backed loans, which allow customers to bring jewelry or coins to the bank and take out loans in lira, the local currency. Credit cards are available linked to gold deposit accounts, and the bank said customers will soon be able to withdraw savings in gold rather than lira.
The Turkish central bank recently raised the ratio of gold that can be held as bank capital for commercial banks, taking it from 25% up to 30%. Central bank Governor Erdem Basci has said he may make adjusting the ratio his main monetary policy tool.
Eric Sprott, CEO of Sprott Asset Management, authored a recent article suggesting that gold could indeed be the solution to the banking crisis (banks’ shortage of “money-good” or solid assets). Some wonder if preparations are underway to reintroduce gold more widely into commercial banking, as it had been recently described as a “zero percent risk-weighted asset” by the FDIC and BIS (Federal Deposit Insurance Corporation, Bank of International Settlements).
In the States, this would mean gold would not be subject to a haircut on the credit risk metric. That only makes sense, because gold is nobody’s liability, but nevertheless is presently assigned a 50% haircut on market risk equal to that of equities and bonds, based on the fact that its price fluctuates relative to dollars.
A 50% haircut on a $1m asset (bond, equity, gold) means $500,000 in cash would theoretically offset adverse market price fluctuations and for calculating liquidity ratios, only ½ of the value of the asset could be counted. For gold however, the liquidity challenges of 2008 did not impact the asset, and in fact gold proved to be very marketable with excellent volume. Due to the recent proof of liquidity tested in very adverse conditions, and market participant views of gold as money, many argue the haircut is mis-rated. As Ray Dalio, hedge fund manager who runs Bridgewater Associates says, “Gold is a currency... So we have dollars, we have euros, we have yen, we have gold... view it as an alternative form of cash.” Cash does not get a haircut to cover fluctuations in price relative to other currencies.
What is essentially a 50% “tax” has not stopped institutions from readily accepting gold on deposit, as the CME (Chicago Mercantile Exchange) did beginning in 2008. The final rules have not been published yet, and the final haircut will help dictate the extent of bank demand for gold. If the haircut is 0%, it will be an admission that gold is indeed viewed worldwide as money, even by the establishment.
As Sprott pointed out in his recent article regarding gold being described as a “zero percent risk-weighted asset” by the FDIC and BIS:
This could possibly bring the cartelized American system closer to international standards of basic human rights such as freedom of choice when it comes to one’s decisions when it comes to money.
As Ron Paul reminded us on August 2:
In case your stomach is growling, and you’re hoping to wrap it up and go eat some Federal Reserve notes, we would mention that mediums of exchange themselves, be they dollars or gold, are not designed to be consumed, but rather to purchase what can be consumed… For more myth hilarity, see this co-authored Mises Institute piece: Top 11 Supposed Myths about the Fed Refuted.