Gold & Basel III’s Trillion-Dollar Question, by Matthew Piepenberg

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.

Continue reading→

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.