Changes in Central Bank Reserves 2020 - some charts

Discussion in 'Markets & Economies' started by mmm....shiney!, Jun 8, 2021.

  1. mmm....shiney!

    mmm....shiney! Administrator Staff Member

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    So what can rational investors take from the data?

    1. The thesis that Central Banks are stacking is simply not true.
    2. Central Banks if they are adding Reserves are largely adding FX Reserves.


    From there the rational investor can draw the following conclusions which have implications for our portfolio rationale.

    1. Central banks value FX reserves above gold reserves.
    2. Central bank purchases are unlikely to be drivers of gold prices.


    So why would the rational investor allot a portion of their portfolio to gold? Again, the rational investor looks at the behaviour of Central Banks, but not for its gold purchases, but for its FX purchases. CBs have an increasing demand for foreign currency, this has the effect that more debt will be issued to meet this demand (and facilitate government spending) which dilutes our purchasing power. So the rational investor allots a portion of our portfolio to gold as an attempt to protect the purchasing power in the face of monetary inflation.

    Central Banks, like governments are public institutions. Public institutions don't need to adopt the same strategies as private firms and individuals. The rational investor doesn't copy the behaviour of public institutions, we plan in order to protect ourselves from their behaviour.
     
  2. markcoinoz

    markcoinoz Member Silver Stacker

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    Hi Shiney,

    Why is Gold still classified as a Tier 1 Asset?

    Cheers Markcoinoz
     
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  3. mmm....shiney!

    mmm....shiney! Administrator Staff Member

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    Can you give me a link to what you’re referencing?
     
  4. hardyakkagold

    hardyakkagold Well-Known Member Silver Stacker

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    Allow me to answer that one for the shiney one .... Because only 1 percent of the population has enough brains in their head to understand that gold
    together with the other precious metals are the only honest form of money that we have on this prison planet!
     
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  5. markcoinoz

    markcoinoz Member Silver Stacker

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    https://www.fxstreet.com/analysis/what-will-basel-iii-rules-mean-for-the-gold-price-202012181719


    https://www.gold.org/goldhub/gold-focus/2021/06/basel-iii-and-gold-market


    The evolution of the Basel Accords
    To understand how we got to an 85% RSF, we need to look at the evolution of the Basel Accords. The treatment of gold by regulators has evolved as the Basel Accords developed. The Basel Committee on Banking Supervision (BCBS) introduced the first iteration of the Basel Accords in the late 1980s to establish minimum capital requirements for banks. This was enforced by the “Group of Ten” economies – countries that agreed to participate in the IMF’s General Agreements to Borrow (GAB). Basel 1 was primarily focussed on credit risk, with bank assets grouped according to risk-weighting. Bullion carried a risk weigh of 0% and was therefore treated like cash.

    Basel II extended the focus to include a larger element of counterparty risk – additional capital was required to mitigate the risk a bank takes on due to its trading, investment or financing initiatives. Launched in 2004, bank assets were divided into three tiers depending on the perceived level of risk, with tier 1 assets deemed the least risky. Under these rules, national authorities had the discretion to treat gold as either tier 1 or tier 3. The BCBS stated that “at national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.2” Under Basel II, a limiting ratio is placed on the amount of tier 3 capital that a bank can hold – tier III must not be more than 2.5x a bank’s tier 1 capital.

    Basel III and the NSFR
    Basel III eliminates tier 3 capital and places new liquidity ratios on banks, specifically the Net Stable Funding Ratio (NSFR). This introduced an RSF factor of 85% for gold held on a bank’s balance sheet.

    NSFR and RSF definition under the current rules
    The Net Stable Funding Ratio seeks to calculate the proportion of Available Stable Funding (ASF) via the liabilities over Required Stable Funding (RSF):

    NSFR = Amount of available stable funding / amount of required stable funding

    Another innovation was the Liquidity Coverage Ratio (LCR). The LCR promotes the short-term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets (HQLAs) to survive a significant stress scenario lasting for one month. It basically sets the minimum liquidity buffer to bridge liquidity mismatches for one month in a crisis scenario. The NSFR has a time horizon of one year and requires that banks maintain a stable funding profile in relation to the composition of their assets and off-balance-sheet activities. Gold was not considered HQLA due to a lack of trading data at the time but it is our view that gold should be recognised as a very high quality liquid asset.

    Cheers Markcoinoz
     
  6. mmm....shiney!

    mmm....shiney! Administrator Staff Member

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    I don’t see any mention of gold in the BIS documents but I don’t have access to a computer.

    I’m not sure what this tangent has to do with Central Banks anyway as the BASEL III concerns itself with commercial banking.
     
    Last edited: Jun 11, 2021
  7. nutshell

    nutshell Active Member

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  8. alor

    alor Well-Known Member Silver Stacker

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    Yellow Gold is Tier 1
    Treasury = Usury = not so sure its capital or debt, dual genders lol

    in another bank,
    Tier 1 is water = liquidity level
    Tier 2 is flowing water = cash flow

    Staying liquid, is to get WET

    you really need a lot of WATER to mine GOLD
    or you will never reach Tier number 1
     
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  9. mmm....shiney!

    mmm....shiney! Administrator Staff Member

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    As I said above, I can’t find any mention of gold in any BIS documents, I’m not sure where the argument that gold is a Tier 1 asset comes from. Remember not long ago Tesla was reported as investing in gold, which was complete BS. The documents backing the claim were actually edited versions of the real Tesla filings to the SEC!!!!

    There’s a huge amount of vested self-interest in the bullion market willing to promote false stories. And those stories get recycled and repeated time and time again.
     
  10. mmm....shiney!

    mmm....shiney! Administrator Staff Member

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    This balance sheet of the BIS mentions gold in the assets and liabilities bit.

    https://www.bis.org/banking/safinstats200930.pdf

    Can anyone interpret bookkeeping for us non-accountant types?

    It’d be nice if we could find a definitive statement from the BIS outlining what exactly constitutes Tier 1 and Tier 2 assets.
     
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  11. nutshell

    nutshell Active Member

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    Every week I receive an emailed post from ABC Bullion. Shea Russell is working for Pallion/Abc Bullion now doing the weekly post and this is this Friday. There is more to it but there is no internet link to the post/blog/whaterver that I can find. It arrives as an email.
     
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  12. mmm....shiney!

    mmm....shiney! Administrator Staff Member

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    No disrespect intended, but I’ve seen bullion companies repeating false information, hence my Tesla story.

    From my reading, there is no actual mention of gold as either a CET1 or AET1 asset. Only much broader classifications, in fact it may be the case that ADIs have to apply to APRA to get a ruling for assets to be classified as one or the other.

    I’ve noted that none of the news reports from bullion dealers or commentators has an actual link to the relevant BIS or APRA documents. It’d be damn helpful to find some.

    Edit to add: in the BIS balance sheet I linked above “Cash and cash equivalents “ was separate to “Gold” etc.
     
  13. nutshell

    nutshell Active Member

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    ... and no disrespect considered.

    Yes, I have noted the lack of links and I usually read commentary from those with an interest in profit from investment with a grain of salt (sometimes more than one grain). I am certainly not as well versed as you in these matters and have scanned through some information such as your link above. However, the existing "gold is tier one" messaging is fairly consistant from a wide variety of sources on the net so this is one heck of an urban legend in the making or perhaps Q has something to do with it
     
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  14. 66rounds

    66rounds Well-Known Member Silver Stacker

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    Which is now about as useful as a yellow pages in the outhouse.

    If I wanted goldbug fluff id read the daily reckoning. Can they hand the keyboard to someone else please?
     
  15. nutshell

    nutshell Active Member

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    @66rounds
    I usually read what comes in every week from ABC but I never signed up for daily reckoning, I saw no reason to, like the rattlesnake, you know what it is before you pick it up. Nevertheless I enjoy reading Shea. I like her style, however I don't have to accept the content.
     
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  16. alor

    alor Well-Known Member Silver Stacker

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    RBA set the rule for the banks, their assets category should be clearly defined there
    BIS only about settlement, so fixed asset is not there
    IMF does not allow gold as money
     
  17. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    By keeping silver and gold commodities and not money they are keeping it very cheap.
    Thankyou from the bottom of my stack.
    I hope for years and years more of this. Print away.
     
  18. alor

    alor Well-Known Member Silver Stacker

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    people know what gold is, telling people what is it not
    will not change gold nature
    Au it is something close to human heart, hence the hatred is just too much, but there is just pure love too
     
  19. markcoinoz

    markcoinoz Member Silver Stacker

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    Hi Shiney,

    From what I have read, Gold is classified as a Tier 3 Level.
    Yet, I have not been able to confirm it, the same as others saying it is classified as Tier 1.

    In the report you posted on page 16: under the heading Share Capital and Reserves

    You have Gold revaluation account.

    At the bottom of the table the heading: Common Equity Tier 1 capital
    Gold is included in the table.

    As part of the capital planning process, Management allocates economic capital to risk categories within its risk-bearing capacity. Allocations are made to each category of financial risk (ie credit and market risk) as well as operational risk. Capital is also assigned to a minimum cushion of capital that is not utilised by risk categories (“minimum capital cushion”) providing an additional margin of safety. The difference between its risk-bearing capacity and the total economic capital utilisation, the "available economic capital", is available for further risk-taking. Reflecting the high level of solvency targeted by the Bank, the economic capital framework measures economic capital to a 99.99% confidence level assuming a one-year horizon, except for FX settlement risk. The amount of economic capital set aside for FX settlement risk is based on an assessment by Management. The Bank’s economic capital framework is subject to regular review and calibration. The following table summarises the Bank’s economic capital allocation and utilisation as well as the resulting available economic capital:


    The table is made up of various instruments to measure the risk.
    It measures the overall solvency, as a framework which also is why Basel 111 is important.
    They create and adjust the overall framework.

    I believe they are meeting in July.
    Someone correct me if i am wrong.
     
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  20. nutshell

    nutshell Active Member

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    Could gold becoming tier 1 be implied by Basel III?

    According to Investopedia*:
    So there will only be Tier 1 and Tier 2

    According to Investopedia:
    Do banks include gold in their financial discloure statements? If so, than gold would not be tier 2. The Management Report of the BIS document linked by mmm....shiney! above it states that:
    Back to Investopedia:
    So both bank funds and gold are both considered fair value by BIS. So it seems to me (no Spock so no logical) that Basel III puts bank funds and gold in the same basket and if bank funds are tier 1 than gold might also be or is tier 1.

    *Investopedia: https://www.investopedia.com/ask/an...between-tier-1-capital-and-tier-2-capital.asp
     

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