On the 28th June 2021 Basel III will change the spectrum of how Gold is valued. This event has been described by some precious metals analysts as the most significant in their careers. So what is it exactly, and how will it change the world for Gold and precious metals investors?
Back in 2008 Lehman Brothers collapsed. They were too big to go down some said. They will be bailed out most said. They weren’t. They fell over. In essence this was due to overleveraged positions, reckless lending, and fudging financial reports. Such was the impact and subsequent recession and to prevent a repeat, some stringent regulations were brought in across the banking and financial sector. The Basel accords were principally designed to enforce better security against lending.
So what does this have to do with Gold? Well, quite a lot actually. Since the dawn of man, Gold has been money and has been used to purchase goods and services, traded and stored as wealth. Central banks around the world hold it and use it as security as it was recently reclassified as a Tier 1 asset. However physical and paper Gold are traded very differently. This is about to change.
Most of us have likely fallen foul of price manipulation in paper gold and silver as precious metals investors. For years some banks have used their powers to slam the paper price via naked shorting and spoofing. Some of the big boys have been found guilty too and fined.
But it still happens because sadly the penalty hasn’t been commensurate to the crime and does very little to discourage the huge profits these big boys make from this illegal activity. So why are they doing it and who stands to gain?
Well if you require a lot of silver to sell for industrial use (which the world needs even more so with the new Biden green plan) and if you want to fill your vaults up with cheap Gold. Whilst agonising for traders, alas those days may be coming to an end. You see under Basel III rules, banks require a provable 1:1 ratio of physical gold. This changes everything.
If unallocated paper gold will soon be incredibly risky and incredibly expensive (bearing in mind the haircut from current levels) then this could be the end of the naked shorting and manipulation we have seen over the years. The London Bullion Market (LBMA) for one have been pushing back and trying to delay this rule change stating it could be the end of some banks.
All this paints a very curious picture when we look at recent price action in Gold. When viewing the highs of mid 2020 at just under $2100 to the present day at around $1800 one has to wonder why; particularly as other major commodities are posting multi year highs.
The Royal Mint recorded an over 500% increase in Gold buying in November and December 2020 compared to the previous year. Silver premiums are at over 50% in the UK.
Physical is becoming more expensive yet futures prices of Gold are plummeting. Whilst no doubt lessons have been learned from the crash in 2008 it would be both naive and foolish to think Wall Street wouldn’t be looking at every possible opportunity to cut your head off if you have gold teeth. With trillions being printed in the US, loose monetary policy across all the world’s central banks, very low interest rates, inflation on the horizon, geopolitical worries, and the dollar being destroyed, why isn’t Gold – a breeding ground for the aforementioned macros – going to The Moon? The answer may be staring us in the face; and getting closer by the day.
So this prompts a quantum of very, very serious questions: Has the Gold price been manipulated down while banks (who have had years to prepare for this upcoming date) load up on cheap physical Gold before the approaching Basel III deadline? Have China been involved as they now have a rumoured stockpile bigger than the US and do they plan on using their massive Gold surplus to back their new digital currency? Will the Comex be able to cope with this additional physical demand especially if delivery is enforced and not the current “get out of jail free” premium monetary settlement? And more importantly, could this lead to a “minimum” price for Gold as banks look to use the new valuation to swallow up their huge debt, therefore leading to higher Gold prices? Why wouldn’t they want the price of Gold to sky rocket if they could use it to refinance? And what is a fair Gold price? $2100? $2500? $5000?
Is this in other words, the monetary reset that has been muted for years? More worryingly if these short positions are not gently unwound soon, could this lead to another Lehman Brothers scenario, albeit potentially on a bigger scale?
Basel III could be a game changer yet it isn’t currently in the general windscreen view. I suspect the banks have a very good reason to keep it at arm’s length while they bleed every last penny out the system.
So from 28th June 2021, Europe will no longer classify unallocated Gold as a Tier 1 asset. It has to be a provable 1:1 ratio which should lead to a physical Gold market. This just has to be viewed as bullish for Gold, and all other precious metals.
This could well be a turning point so expect huge volatility in the run up to what could be a permanent change in the landscape on how the oldest and still the benchmark of the precious metals is valued.
Last chance to load up on these price levels? It could well be. Excited? You should be. Let’s hope the banks have learned from 2008 and we aren’t heading for Lehman Brothers 2.0.