Basel III: Gold to be considered for Tier 1 status

pmbug

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Basel III is supposed to come into effect at the end of this month. I'm still seeing mixed reporting out there on what it means for banks and gold.
 

rblong2us

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This is an old thread and I had pretty much forgotten about Basel3
I thought the TBTF banks had everything they needed )-:

So what does the mixed reporting suggest might happen Bug ?

and in reply to your previous post on this thread -

So, it seems that we understood it backwards - gold isn't going to be valued at 85%, it's going to be valued at 15%. 85% is the value of cash they need to hold in reserve to cover the value of the gold (in case the market/price crashed).
A great way to get gold holders to give up on the idea and buy it up at a sale price
They clearly will do pretty nasty and desperate things to obtain enough gold to keep the show on the road ?
 

pmbug

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...
So what does the mixed reporting suggest might happen Bug ?
...
Some suggest it means banks will be increasing gold holdings as it's a now a better asset. Others, as you quoted, suggest it's actually now a worse asset and will lead to banks selling off gold holdings.

I wish I could find a definitive source explaining the situation in clear language.
 

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Here's another report on Basel III written by someone who sounds a lot like a gold bug, but which also describes the 85% haircut as requiring banks to hold more cash collateral for gold holdings:

http://bmg-group.com/gold-zero-risk-monetary-asset/

The author briefly mentions the NSFR issue then talks about how gold qualifies as “a 0% risk weighting for risk-based capital purposes.” It doesn't really explain what that means though.
 

pmbug

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Yeah, I'm not sure that author had all his facts straight. Initial reporting on Basel III (as per the OP of this thread) were indicating a tier 1 asset with 100% valuation as he mentions, but that changed.
 

rblong2us

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Ok so if Basel III came into effect 11 days ago and the price of gold has moved $10 and is broadly where it was a month ago, what might we conclude from this ?
 

pmbug

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Well, if the gold price was actually based upon the physical market, we might be able to draw a conclusion. But it's not, so ... ???
 

Unobtanium

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But it's not, so .......

so the price of gold will not significantly increase until either:

1) Gold becomes scarce because the physical market gets very tight; and maybe Basel III has an impact on that due to heavy accumulation by central banks, or

2) TPTB want it to increase, and they might want it to increase now that gold has Tier1 status via Basel III.

Edit:
3) The price of oil rises significantly again for a sustained period.
 
Last edited:

rblong2us

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So we can conclude that Basel III has no effect on POG ?

why would TPTB want an increase in POG if they have to have cash deposits to 85% of its value

and how might they respond if POG were to rise rapidly ?

The cash deposit required to back gold holdings seems like a great way to suppress price )-:
 

pmbug

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Found this report from late January:
European finance ministers have rejected a proposal to ease new liquidity rules for banks trading gold, the London Bullion Market Association (LBMA) said.

The industry says the planned rules could force some players out of the market. Due to take effect in the European Union around 2022, they form part of regulations known as Basel III designed to make banks more stable and prevent a repeat of the financial crisis a decade ago.

The rules treat physically traded gold like any other commodity, requiring banks to hold more cash to match their gold exposure as a buffer against adverse price moves.

The LBMA says they are unnecessary, costly and would disrupt London’s bullion clearing system, which settles gold transactions worth around $23 billion a day.

EU finance ministers rejected a proposal by the European Parliament to lower the percentage used to calculate the liquidity buffer that banks must hold to 50 percent from 85 percent.

Instead, the European Banking Authority (EBA) will examine whether to lower the percentage or exempt precious metals from the buffer, known as the net stable funding ratio (NSFR), the LBMA and the European Council said.

“We are still optimistic,” said the LBMA’s general counsel, Sakhila Mirza. “While we were hoping for that 50 percent, ultimately our aim has always been getting an exemption.”

The LBMA, whose members include major gold refiners and bullion-trading banks, says gold is liquid enough not to need an additional liquidity buffer for clearing and settlement and short-term transactions.

It says the rules could mean a number of banks stop trading or settling gold, curtailing market liquidity. London is one of the world’s biggest bullion markets.

Mirza said the review was likely to last two years. The EBA will then make recommendations which would have to be approved by the European Commission, parliament and council of ministers.

She said the LBMA was preparing to lobby the EBA and that data the LBMA began publishing last year showing for the first time how much gold and silver trades in London each day would help convince the EBA of the need for an exemption.

While Britain plans to leave the European Union this year, the EU’s approach is likely to inform how Britain applies the Basel III requirements.

A European Council official said the EBA had been tasked with reviewing the NSFR requirements for precious metals and did not comment further.
https://www.reuters.com/article/us-gold-regulation-nsfr-idUSKCN1PI12A
 

rblong2us

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going back to this -
So, it seems that we understood it backwards - gold isn't going to be valued at 85%, it's going to be valued at 15%. 85% is the value of cash they need to hold in reserve to cover the value of the gold (in case the market/price crashed).
I find myself pondering if it doesnt mean that COMEX aqnd other futures markets would be obliged to hold 15% of the paper contracts as actual metal ?

This would be an interesting shift from the approx 0.5% they currently seem to hold.
 

pmbug

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I'm pretty sure the Basel III is a standard for the banking industry and doesn't have any bearing on the commodity exchanges. As the latest article above shows, the LBMA was concerned about how it will affects banks trading metals. It could potentially cause a liquidity crisis on the exchanges if the banks just close down their metal trading desks.

Should this happen, I suppose we might finally see a violent event where the futures/paper market no longer sets the price for the physical metal.
 

pmbug

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* bump *

Was reading back through this thread today while reflecting on recent news (bold emphasis is mine)...

U.S. regulators were investigating Bank of Nova Scotia’s (Scotiabank’s) (BNS.TO) metals trading activities several months before it told staff it would wind down the unit, according to its most recent earnings report.

Scotia, one of the most venerable names in the gold trade, told staff in a global call on April 28 that it would wind down its metals business by around the start of 2021, two sources familiar with the matter told Reuters at the time.
...
The winding down of Scotia’s metals business draws the curtain on what was for years the world’s biggest lender to the physical precious metals industry, with a history stretching to the founding in 1684 of London gold dealer Mocatta Bullion.

Scotia’s senior management had long viewed its metals business as inherently high risk and out of step with its core strategy, six sources familiar with the matter said.

In its heyday a decade ago, ScotiaMocatta, as the unit was known, brought in around $300 million a year, but increasing regulation has required more capital to be put aside to back trading, making it less profitable.

In 2017, Scotia decided to sell the metals business, but failed to find a buyer and instead sharply downsized it.
...
https://uk.reuters.com/article/us-m...e-before-metals-closure-filings-idUKKBN22K1Q7

Basel III holla!
 
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