The Federal Deposit Insurance Corporation (FDIC) yesterday issued a notice of proposed rulemaking that revises the measurement of risk-weighted assets by incorporating the latest changes to the Basel III framework and by implementing changes brought on by the Dodd-Frank Act. Among the many changes is one that allows banks to use gold reserves to mitigate derivative risk with a zero percent risk weighting. Essentially gold is now as good as cash, and way better than Fannie or Freddie bonds or other mortgage-backed securities.
The change also leads to the conclusion that there might be a serious uptick in the demand for gold. Not just among investors, but from the banks themselves. The impact on funds like the SPDR Gold Shares (AMEX: GLD) and iShares Gold Trust (AMEX: IAU) is likely to trail along behind any increased demand from banks. Gold miners like Yamana Gold Inc. (NYSE: AUY), Newmont Mining Corp. (NYSE: NEM), and Barrick Gold Corp. (NYSE: ABX) are very likely to see shares prices rise as demand increases.
It is still early days to predict that demand for gold will spike on the FDIC’s proposed rules. The comment period has just begun, and it’s not entirely clear that modern banks would welcome a return of gold as a riskless asset. For one thing, it’s totally unnecessary to modern finance. For another, it’s probably been included in the new rules as a sop to some goldbug or other. Another few months should tell the story.