BASEL III: The Game Changer

WHAT IS IN BASEL III?

A silent transformation is about to take place. The price of gold might be permanently affected due to the proposed changes, spearheaded by BIS (Bank of International Settlements), an exclusive group of Central Bank Governors, governed by 58 influential member nations.

Present day banking throughout the world is governed by the guidelines set forth by the BASEL Committee on Banking (of BIS) in the form of BASEL regulations (named after the city of Basel, Switzerland, where this group meets and where the headquarters is). The new BASEL III, proposed to include some radical changes, will change the financial landscape of gold market fundamentally.

ABOUT BASEL

Banks are required to keep provision of capital against their assets, sketched as Risk Weighted Assets. So, the assets have been categorized, according to their risks. The more risky an asset class is, the more provision. First introduced in 1988 to provide a set of minimum capital requirements for banks, known as BASEL I, it was meant to regulate banking industry with a set standard worldwide, as part of New World Economic Order. Since then, BASEL has been considered as global standard for banks  on capital adequacy, stress testing and market liquidity risk.  A more comprehensive set of guidelines,  known as BASEL II, were initiated in 2004. The proposed new changes, coined as BASEL III, are the offshot of financial crisis the world has experienced since 2008.

Tier I capital (core capital) consists, among others,  of treasury securities and mortgage backed securities. Gold used to be considered as tier III capital. Not only that, only 50% of value of gold would be considered, to be included in the capital.

The reality during the last few years have proven to be otherwise. The present monetary system has infected the value of these paper assets of tier I capital from inside, leaving their true value minimal. So banks have realized that whatever has been labelled as  real, is not so. So, they have been compelled to recognize what the true value is.

Accordingly, the status of gold has been "elevated", so much so that it will now be part of tier I capital. Not only that, previously banks were required to keep 4% of tier I capital against their risk-weighted assets. Under proposed rule, the requirement would be 6% of tier I capital.  The result, obviously is a rise in demand for elements  consisting tier I. That means, banks would require not only replace a portion of  their paper assets with bullions, but may use it to meet 2% extra need as well. A very bullish sign indeed.

THE NEW GOLD STANDARD

Starting January 1, 2013 when BASEL III becomes effective, it will usher in a new era for gold market. So, officially from then on, Gold Is Money. Already banks and central banks throughout the world have begun to stockpile their reserve for gold, as a result of its full status as a financial asset. In fact, the World Gold Council revealed that net central bank purchases in 2011 exceeded 455 tonnes, the largest purchase since 1965. And it reported banks will purchase 700 tonnes of gold for this year alone.  

So, in this process of re-monetization of gold, much events are awaiting to be seen in the forthcoming months.

 

The Future of Riches

New Economic Reality

The economic trend of the globe is moving towards the East, according to a recent report. By 2050, the global economic centre of gravity is poised to be in Asia, where top 4 countries out of 5 in terms of per capita income will be. The report predicts that within 40 years, Asia will boast more wealthier residents than any other continents.

Fastest Growing economies

Compiled by Citibank and a property consultancy named Knight Frank, it’s a lengthy analysis styled "The Wealth Report 2012," based partly on interviews with the super rich (people with more than $25 million in investable assets). The most interesting part of the study is that, it predicts that Singapore-the tiny Southeast Asian city-state will be the world’s richest nation by 2050, with an estimated per capita income of $137,710.By that they mean its per capita GDP at purchasing power parity (that is, it attempts to more accurately measure the average income by considering inflation, cost of living and exchange rates).

More interestingly, the report predicts that India, Bangladesh, Vietnam, the Philippines, Mongolia and Sri Lanka all make the fast-growing list. Of the top 10 fastest rising economies- all but three are in the region (Table-2).  By contrast, the western European countries as well as Japan will be the worst performing ones.

Shifting Centre of Gravity

LSE professor Danny Quah forecasts that by 2050 the world’s economic centre of gravity- a theoretical measure of the focal point of global economic activity based on GDP, will have shifted eastwards to lie somewhere between China and India. In 1980 it was in the middle of the Atlantic.

Apart from those who inherit wealth, most of the millionaires are business owners. To be able to amass such huge amounts of wealth, means there must be an alignment between opportunity and ability present in these economies. The sectors where most wealth are generated from are- natural resources, manufacturing and construction. Citi forecasts that the North American and Western European share of world real GDP will fall from 41% in 2010 to just 18% in 2050. Developing Asia’s share is expected to rise from 27% to 49% in 2050.

China will overtake the U.S. to become the world’s largest economy by 2020, which in turn will be overtaken by India in 2050. Russia or Brazil (part of so-called BRIC) do not make it on to Citi’s list of Global Growth Generators (“ 3G” countries). Instead Citi includes countries such as Bangladesh, Egypt, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam on this list.

While these countries can expect rapid economic growth, much of the wealth already held in developed economies will be maintained, according to Citi.

Measuring a country’s affluence in terms of GDP per capita shows that Singapore currently tops the chart. By 2050, Singapore is expected still to be in the top spot, with Hong Kong and Taiwan moving up to take the second and third places. But the U.S., Canada, UK, Switzerland and Austria will all still be in the top 10, although the U.S. will have dropped down to fifth place in the overall rankings (table-3 ). And the U.S. is the only non-Asian nation to make it through top 5.

Canada, Switzerland and Austria will be able to maintain their berth into the top 10 list upto that time (2050). But old world economies will have the worst growth performance in the next 40 years, the report predicts. Spain, France, Italy and Germany are at the bottom of this list. But, Japan and its aging population will have the weakest projected growth of all economies, Knight Frank estimates.

Most of the countries coined as 3G are currently known as “emerging markets”. But this term is used to tag those countries that are considered likely to thrive in the globally integrated economy.

 

Table 1: THE WORLD’S LARGEST ECONOMIES

2010	Countries	GDP $tn	2050	Countries	GDP $tn
1	US	14.12	1	India	85.97
2	China	9.98	2	China	80.02
3	Japan	4.33	3	US	39.07
4	India	3.92	4	Indonesia	13.93
5	Germany	2.91	5	Brazil	11.58
6	Russia	2.20	6	Nigeria	9.51
7	Brazil	2.16	7	Russia	7.77
8	UK	2.16	8	Mexico	6.57
9	France	2.12	9	Japan	6.48
10	Italy	1.75	10	Egypt	6.02

·         GDP by purchasing power parity (PPP)

·         Source: Global Growth Watchers, Citi Investment Research and Analysis, 2011

Table 2: ECONOMIC GROWTH (3G) 2010-2050

	TOP 10	%	BOTTOM 10	%
1	Nigeria	8.5	Spain	2.0
2	India	8.0	France	2.0
3	Iraq	7.7	Sweden	1.9
4	Bangladesh	7.5	Belgium	1.9
5	Vietnam	7.5	Switzerland	1.9
6	Philippines	7.3	Austria	1.8
7	Mongolia	6.9	Netherlands	1.7
8	Indonesia	6.8	Italy	1.7
9	Sri Lanka	6.6	Germany	1.6
10	Egypt	6.4	Japan	1.0

·         GDP change year on year

Table 3: GDP PER CAPITA

2010	Countries	$US	2050	Countries	$US
1	Singapore	56,532	1	Singapore	137,710
2	Norway	51,226	2	Hong Kong	116,639
3	US	45,511	3	Taiwan	114,093
4	Hong Kong	45,301	4	South Korea	107,752
5	Switzerland	42,470	5	US	100,802
6	Netherlands	40,736	6	Saudi Arabia	98,311
7	Australia	40,525	7	Canada	96,375
8	Austria	39,073	8	UK	91,130
9	Canada	38,640	9	Switzerland	90,956
10	Sweden	36,438	10	Austria	90,158

·         2010 PPP US $

The report notes that tough economic times over the past few years have not affected the rise of centa-millionaires, people with more than $100 million in assets. Today there are 63,000, up 29 percent since 2006. However, rapidly rising GDP does not tell us much about the distribution of wealth. Many of the richest countries in the world today – Qatar, for example- have tremendous wealth gaps. “The distribution of that wealth will be dictated by political factors as much as the economic process itself,” noted Willem Buiter, Citi’s Chief Economist, in the report.

The Future?

CNN notes that some of the West’s super-rich are already crossing the Pacific, in anticipation of the “new Asian Century”. Facebook co-founder Eduardo Saverin, moved to Singapore in 2009 and renounced his US citizenship. Jim Rogers, the co-founder of the Quantum Fund with George Soros, did the same and is now teaching his daughters Mandarin. “I’m preparing them for the 21^st century by knowing Asia and by speaking perfect Mandarin”, he told CNN. “It’s easier to get rich in Asia than it is in America now. The wind is in your face. (The US) is the largest debtor nation in the history of the world,” Rogers added.

The report warns that the dissatisfaction with income inequality shown in the Occupy Wall Street demonstrations “will gain momentum, and that there could be a long-term recalibration between governments, businesses and society as a result.” No doubt, there could be phenomenal shake-up in global economic and political landscape during these times ahead, with massive scopes of wealth re-distribution. The ones who are well-informed and keen will definitely reap the benefits.

O Canada!

Canada has Resources

When someone considers Canada, the first things that pop up in the mind are- maple leaf, harsh winter, and….natural resources!

Canada has natural resources like Saudi Arabia has oil and South Africa has diamond. Its no surprise that Canadian economy is largely resource based. With 1.7 trillion barrels of oil and plenty of gold and timber, Canada’s resource sector is the backbone of its triple-A rated economy.

Not only extracting and utilizing these resources from Mother Nature, the Canadians have taken this resource expertise to global level. They haven’t been content to stay home and ply their trades domestically. They are more adventurous than that. “Canadian know-how” has left few areas of the earth unexplored. Presently Canadian mining companies operate in 350 off-shore mines in different parts of the globe. They search for silver in Mexico and South America, gold in China, platinum in South Africa, diamonds in Namibia, oil in Indonesia, Iron from Sweden…well you get the picture.

Abundance above and beneath the Earth

Natural Resources- categorized as forests, minerals and metals, energy- form the backbone of the economy. These sectors have been engine of economic growth and job creation for generations. In 2009 alone, the sectors generated 11 percent, or $133 billion, of Canada’s GDP and directly employed 759,000 people.

Canada’s considerable natural resources are spread across its varied regions. In British Columbia the forestry industry is of great importance, while oil and gas industry is important in Alberta and  Northern Ontario is home to a wide array of mines. Canada is a world leader in the production of many natural resources such as gold, nickel, uranium, diamond and lead. It also is endowed with mineral resources of coal, copper and iron ore. Several of Canada’s largest companies are based in natural resource industries, such as EnCana (TSX: ECA), Cameco (TSX:CCO), Goldcorp (TSX: G) and Barrick Gold (TSX: ABX).

Gold

Canada is the 8^th largest gold producer in the world. As per 2011 estimate, 101 MT or 3.6% of global production was made in Canada.

The west of township of Timmins, located in the famous Abitibi Greenstone belt in Ontario-Quebec border is the major center of gold play. So far, 180 million ounce of gold have been found and 70 million ounce have been mined. Another prospecful area is the Yukon Territory. Since the famous Klondike Gold Rush in 1897, a new episode of New Yukon Gold Rush is taking place. It’s mainly happening due to the placer gold, washed by water and gravity, originating from a distant source. It is estimated that the amount of placer gold would be around 160 to 180 million ounce range.

Minerals

Many minerals are found within ancient rocks of the Canadian Shield, which is located in Central and Eastern Canada. Canada leads the world in the production of uranium, which is the fuel for nuclear power stations. Modern energy-hungry world will be hell-bent to get access to this precious radioactive metal. Canada is also the leading producer of potash- used for making fertilizers- with 33 percent of world’s supply (in 2005).

Fossil Fuel Resources

A new source of oil- oil sands- is being exploited in places such as Fort McMurray in northern Alberta. This is a mixture of thick oil and sand that is dug up and heated, releasing the oil which is then piped off. Known as Athabasca oil sands, this vast reservoir in Alberta give Canada the world’s third largest reserves of oil after Saudi Arabia and Venezuela, according to USGS.

Canada currently ranks as the world’s sixth largest producer of crude oil after Saudi Arabia, Russia, U.S., China and Iran, according to U.S. Energy Information Administration. Resurging growth in Western Canadian oil production and new oil sands investments drive the positive outlook. Canadian oil production is poised to more than double to 6.2 million barrels per day by 2030, which will put Canada in the top three to four oil producers in the world.

Global Center for Resource Financing

Toronto, Canada’s largest city and commercial center, is generally viewed as the mining finance capital of the world. Toronto is home to the Toronto Stock Exchange (TSX), to more than 400 mining and exploration company offices, over 30 mining company head offices and several hundred mining suppliers, consulting firms and service providers. The TSX is the global destination for financing international projects. During the last five years, 32 percent of global mining capital and 82 percent of financing transactions were handled through the TSX.

Future of Resource Based Economy

Countries with treasure troves of natural resources ordinarily experience currency appreciation during commodity bull markets. It is evident from the U.S. dollar and the loonie (Canadian currency) being in parity right now. And considering the commodity super cycle we are currently in, we suggest the bull market in Canadian dollars still has many years to run. The stocks in TSX and TSX-Venture also have yielded explosive gains during these times. Especially the junior mining stocks have been showing valuable returns.