As banks shift their paper and physical gold positions after Basel III’s effective date, what will be the effect on the gold price? From Matthew Piepenberg at goldswitzerland.com:
June 28th has come and gone, which means the much-anticipated Basel III “macro prudential regulation” to make so-called “safe” banks “safer” has officially kicked off in the European Union (as it will on July 1 for U.S. banks and January 1, 2022 for UK banks).
The trillion-dollar question for gold investors is now obvious: What next?
The short answer is: Gold will rise, but don’t expect a straight line or zero discomfort/volatility.
The longer answer, however, deserves a bit more context, unpacking and plain-speak; so, let’s roll up our sleeves and start from the beginning.
What is Basel III?
Basel III is essentially a long-delayed, controversial and internationally agreed-upon banking regulation which now, among other things, requires commercial banks to change their “net stable funding ratio” for gold held as a tier 1 asset on their balance sheet from 50% to 85% to make banks “stronger and more resilient in times of crisis.”
(Hidden premise: Are the BIS and its regulated banks worried about another “crisis”?)
Translated into non-banker English, for each asset a bank buys, they have to insure “stable funding” (as opposed to repo money, demand deposits or excess leverage) to buy/lever more stuff…
Translated even more simply, banks can’t use as much “maturity transformation” or “duration mismatches”—i.e., leverage and short-term money for long-term speculation (arbitrage)—to buy and sell precious metals, among other things.
Basel III, in essence, is requiring banks to engage in longer (rather than shorter-term) lending, and in a nutshell, this makes it far more expensive for banks to own “unallocated” gold, as most of the gold they owned in the past was just tier 3 paperlevered to the moon.
Getting back to more banker-speak, Basel III is an open move that requires banks to de-lever (slow down) their trade in paper gold.