The end of paper gold and silver markets , by Alasdair Macleod

The banking regulators may regulate gold and silver derivative, or paper, markets out of existence. That could be quite bullish for physical gold and silver. From Alastair Macleod at

This article looks at the likely consequences of the Bank for International Settlements’ introduction of the net stable funding requirement (NSFR) for bank balance sheets, insofar as they apply to their positions in gold, silver and other commodity markets.

If they are introduced as proposed, banks will face significant financing penalties for taking trading positions in derivatives. The problem is particularly important for the London gold market, as described in last week’s article on this subject. Therefore they are likely to withdraw from providing derivative liquidity and associated services.

This article delves into the consequences of the NSFR leading to the end of the London forward markets in gold and silver. Replacement demand for physical metal appears bound to rise, and an assessment is therefore made of available gold not tied up in jewellery and industrial uses. An analysis of gold leasing by central banks, leading to double ownership of physical gold, is included.

The conclusion is that unless the BIS has an ulterior motive to trigger a chaotic financial reset of some sort, it is a case of regulators not understanding the market consequences of their actions.


Last week I explained why as they stand the new Basel 3 regulations will make it uneconomic for banks to continue to run bullion trading desks.[i] The introduction of the net stable funding requirement (NSFR) means that mainland European banks, of which ten are LBMA members including the Swiss, will have to comply with the new regulations from the end of June, and all UK banks, in effect the entire banking membership of the London Bullion Market Association (LBMA) will have to comply by the year-end. There are 43 LBMA members listed as banks, and on Comex there are currently 17 with long and 27 with short positions in the Swaps category, which represent bullion bank trading desks in the dominant futures contracts. So being similar, the Comex numbers must broadly replicate those operating in London. It is therefore reasonable to assume that if the LBMA’s banking membership ceases dealings in unallocated bullion, then very few will continue to deal on Comex — the LBMA crowd having ceased taking trading positions.

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