Continuing from Part 1
Why Gold Price Rising? (Feat. Basel 3, India, China, Egypt, Turkey)
56. Central banks’ gold purchases are influenced by Basel III regulations.
57. The Bank for International Settlements (BIS) is an international organization established in 1930 by the Hague Agreement.
58. Initially, the BIS facilitated Germany’s World War I reparations and later became a forum for G10 central banks to discuss financial matters.
59. Basel is a Swiss city with a population of approximately 200,000.
60. In 1974, the failure of Germany’s Herstatt Bank caused issues for its international banking partners.
61. The complexity of individual bank responses highlighted the need for international cooperation among banks.
62. In late 1974, the G10 central bank governors met, leading to the establishment of the Basel Committee on Banking Supervision (BCBS) under the BIS, headquartered in Basel.
63. During the 1980s, several Latin American countries faced sovereign defaults due to excessive foreign debt, adversely affecting the capital ratios of global banks invested there.
64. The Basel Committee began developing internationally applicable bank capital adequacy regulations.
65. In July 1988, Basel I was introduced, recommending banks maintain capital equal to 8% of their risk-weighted assets.
66. Basel I applied a uniform 100% risk weight to all credit exposures, regardless of the borrower’s credit quality.
67. In 2004, the Basel Committee introduced Basel II, which assigned varying risk weights based on the borrower’s credit rating.
68. This approach allowed lower risk assessments for loans to higher-credit-quality borrowers.
69. The 2008 financial crisis revealed Basel II’s shortcomings, prompting the Basel Committee to undertake a comprehensive review of its standards.
70. In 2010, the BIS completed this review and announced Basel III, with implementation starting in 2023.
71. You might wonder how Basel III affects our daily lives.
72. Basel III imposes stricter risk-weighting on household loans.
73. Banks with high proportions of consumer loans must adjust their portfolios to include more business loans to meet the required ratios.
74. This shift has led to tighter regulations on personal loans, including mortgages and credit lines, with additional measures like stress tests and debt service ratios being implemented.
75. Discussing Basel III in detail is essential because it directly impacts the physical gold market.
76. Under Basel II, physical gold was assigned a 50% risk weight.
77. With the implementation of Basel III in January 2023, physical gold is now considered a zero-risk asset, classified as Tier 1, the safest category.
78. This reclassification is one reason central banks are increasing their physical gold reserves.
79. Beyond supply and demand factors, other elements influence gold prices.
80. Gold prices often have an inverse relationship with the U.S. stock market.
81. From 1950 to 1970, as U.S. stocks rose by 1,223%, gold prices declined by 13%.
82. Between 1980 and 2000, the Nasdaq surged by 3,485%, while gold prices fell by 62%. From 2011 to 2022, the Nasdaq increased by 547%, and gold prices rose by 36%.
83. These figures suggest that gold prices didn’t increase significantly during these periods.
84. Conversely, from 1971 to 1980, while stocks grew by 19%, gold prices soared by 1,970%. Between 2001 and 2011, as the Nasdaq dropped by 33%, gold prices climbed by 607%.
85. Historically, since 1950, the U.S. stock market and gold prices often move in opposite directions.
86. However, since 2024, both the U.S. stock market and gold prices have been rising together, which is an unusual occurrence historically.
87. Then next time, let’s discuss why gold, the U.S. stock market, and Bitcoin prices are rising together.
Alphazen Insights
The simultaneous rise in gold prices and the stock market has been discussed previously, so I won’t repeat it here. In summary, gold is viewed more as a means to preserve wealth during crises rather than a tool for high returns. Holding about 10–20% of your investment portfolio in gold can be prudent. However, the recent surge in domestic gold prices appears to be driven by speculative demand, so caution is advised.
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