The Canary in the Gold Mine 

With the euro-area crisis and associated uncertainty escalating rapidly of late, safe-haven assets are outperforming, with the notable exception of gold. Why are high-quality government bonds rallying to new highs, while gold sinks to a six-month low? A key explanation is surprisingly simple if technical: Government bonds are Tier1 capital assets, gold is not (yet). With many banks already undercapitalised, as losses mount anew, so must banks acquire additional Tier1 assets to maintain their mandated capital ratios. As such, to the extent that banks or other financial institutions hold gold, but need to raise regulatory capital, they must sell the former for the latter.
Regulatory capital is just that, regulatory. In 2008, distressed banks had no choice but to maintain adequate Tier1 ratios or risk being shut down or taken over by the regulators. ….from a peak of nearly $1,000 reached in March that year, notwithstanding its fundamental safe-haven status, gold plummeted 30%, to nearly $700 by November.
In a recent article in the Financial Times, it was reported that, “The Basel Committee for Bank Supervision, the maker of global capital requirements is studying making gold a bank capital Tier 1 asset. ”This is a hugely underappreciated development. For if it happens, it will be an important step toward the re-monetisation of gold. Gold would be able to compete on a level playing field with government bonds…..In my opinion, if gold becomes eligible as Tier1 collateral, the price is likely to soar to a new, all-time high.

                                                            ………… John Butler.