Is The BIS Setting Up The World For Another Meltdown?
On the heels of another wild trading week, is the Bank for International Settlements (BIS) setting up the world for another meltdown?
Stephen Leeb: “In 2013, the Bank of International Settlements (BIS), one of the most powerful institutions you may never have heard of – blew it. It snubbed gold. I’ll explain how in a moment – contributing to gold sinking from $1,800 an ounce in October 2012 to below $1,200 by the end of June 2013, a massive 35 percent plunge in a mere eight months. The downtrend continued until the end of last year when gold briefly traded below $1,050…
“Forget about the impact on gold investors. The real tragedy is that the BIS’s disdain of gold paved the way for today’s utterly untenable global economic mess. The ironic upshot is that today the world desperately needs gold to assume a more prominent monetary role. If central banks don’t act accordingly, the world is likely to descend into chaos in which gold will seize such a role anyway. Either way, gold will win.
The Tower Of Basel (BIS) – The Central Bank That Really Runs The World
Let’s return to the BIS, known as the central bank of central banks. In 2013 the BIS, in the aftermath of the financial crisis, had the job of refining the rules that would make sure banks would have enough of a liquidity buffer to ensure there would be no repetition of the 2008 financial meltdown. During the worst of the crisis banks were left so high and dry that GE nearly missed a payroll because it did not have access to enough liquidity. The goal was a buffer large enough to cover net bank withdrawals over an extremely stressful 30-day period.
It was widely assumed that the BIS would include gold as a financial asset banks could use as part of their liquidity. But, amazingly, when the BIS issued its so-called Basel III recommendations, gold was nowhere to be found. Instead, the BIS listed sovereign debt, common stocks, and BBB+ bonds as among acceptable forms of liquidity — some with a haircut, i.e., at less than full face value.
Omitting gold was extraordinary given gold’s outstanding performance. Between September 30, 2007 (when the Great Recession started) through March 6, 2009, when the market bottomed, gold’s 26 percent gain left every other asset in the dust. Only long-dated U.S. Treasuries came close. Germany’s 30-year note lost about 20 percent, while Britain’s 20-year bond lost about 40 percent. The S&P 500 lost over 55 percent. Furthermore, only U.S. bonds were less volatile than gold.
In other words, by most objective measures gold would have been far and away the most suitable liquidity buffer. Yet the BIS shunned gold in favor of common stocks and mediocre bonds. Let’s note in passing that the pound, which had been designated as a no-haircut liquidity buffer, is the currency of a country on the verge of cutting its ties to Europe while owing foreigners nearly six times its GDP. Also striking is that the assets the BIS favored were mostly those that could be created at will – a.k.a money printing.
BIS’s Real Motive As The West Is Headed For Another Meltdown
You have to figure that the BIS was either wanting another crisis or, more likely, had some ulterior motive. The problem is that the only plausible ulterior motive was one that virtually guaranteed another crisis down the road – which is exactly how things have played out.
The BIS, in my view, was intent on preventing gold from being viewed as a currency on par with the dollar. Its fear was that if gold – the only financial asset that can’t be created at will – were treated as a currency, it would quickly grab status as the premier financial asset, the de facto reserve currency of choice. The dollar would play second fiddle, with very uncertain consequences for America.
Flash forward three years. The BIS and Western central bankers in general may feel satisfied that they achieved one goal: the dollar remains the world’s most important reserve currency. But insofar as another goal was to protect the West from another meltdown, they should be a lot less pleased with themselves.