Gold bugs are speculating on the impact of Basel III regulations that are expected to come into effect next month. European banks, minus those in the most important London markets, will soon be subject to Net Stable Funding requirements.
The effect may be to reduce banking activities in the paper metals markets.
Marketwatch has actually put together a fair summary of the regulations and their potential impacts. The new rules appear to recognize the risk associated with owning derivatives versus owning real products. They will be required to hold additional reserves to offset any tin they have on the books.
However, tangible bullion is classified as a “zero risk” asset, as long as it is hedged and in an allocated form.
But unallocated gold holders – holders of gold derivatives, gold leases and other riskier instruments without direct backing – will be required to hold an 85% reserve as compensation.
Bullion investors are cautiously bullish as it appears regulators recognize the risks inherent in leveraged foil markets. Rules that penalize participation in these derivative markets and encourage banks to hold the allocated physical metal would be a step towards more honest price discovery.
However, there are very few communities more skeptical of regulators than investors in physical bullion. They were continually abandoned by captured agencies such as the CFTC. Most will wait until metal prices reflect fundamentals more correctly before crediting the Bank for International Settlements with fixing the issues.
Having said that, there are reasons to be hopeful. He comes from another organization with few fans. The London Bullion Market Association – LBMA – has issued dire warnings against the new rules. If this group of crooked bankers oppose it, it is a good sign.
The LBMA complains that the updated net stable funding requirements:
“Undermine clearing and settlement – The stable funding required for short-term assets would dramatically increase costs for LPMCL clearing banks to the point that some would be forced out of the clearing and settlement system, which could even risk collapsing completely. “
LBMA Most golden bugs will cry “Hallelujah!” if the price-rigging banks are forced out of the paper markets.
“Deplete cash flow – The required stable funding would dramatically increase costs for the remaining LPMCL members taking gold on deposit to be held as unallocated metal compared to the cost of custody of the allocated metal.” “
There will be few tears shed if liquidity in the derivatives market decreases, and some migrate to the markets for the physical metal allocated. Paper markets are almost completely out of touch with fundamentals like physical supply and demand.
“Dramatically Increase Funding Costs – The required stable funding would penalize LBMA members who hold unallocated precious metal balances. This would increase the cost of short-term precious metals financing transactions, as stable financing costs are passed on to non-bank market players.
“Such cost increases would impact miners, restrict refining, and increase the costs of an inelastic key input for industrial and consumer goods. This includes some essential medical equipment and technologies needed to reduce pollutants (such as catalytic converters).
The last sentence implies that LBMA member banks are helping medical equipment makers and the environment, but they won’t be able to do so without the unlimited ability to trade in foil. It’s rich. Bullion investors have seen chat logs that demonstrate how charitable and caring these bankers are!
“Reduce central bank operations – Fewer LPMCL clearing banks can reduce central bank deposits, loans and swaps of precious metals. These operations are essential to offset the costs of storing gold reserves and generating income. In addition, it provides significant liquidity to the market.
This review hints at what might be the best reason to support the new rules.
Anything that reduces the ability of central banks to intervene in metals markets would be a good thing. All loans and exchanges have only one purpose; artificially increase the supply of metals and ceiling prices.
It is important to note that the new rules do not come into effect in the London markets until the end of the year. There is still time for the LBMA and its member banks to seek to further delay the rules and promote change.
The golden bugs know better than relying on regulators to do the right thing, but our fingers are crossed.