Impact of Basel III on the Gold Market?

Those who closely follow the precious metals markets know that there has been some reporting and analysis on the upcoming Basel III rules that will make it harder for banks to utilize unallocated gold assets as they have in the past. The new rules make it clear that allocated gold must be held in order for the asset to be viewed as equal to cash. Andrew Maguire has commented on this situation for some time and talked about it in detail in this recent video update. He believes this will impact the price of gold upwards as the new rules are implemented. He thinks this will also spill over and positively impact the price of silver.

There is some debate as to how much this may impact the gold market, but most agree the situation should be watched closely.  Jim Rickards recently posted on his Twitter feed that he does not see Basel III as having a major impact.

In this recent deep dive article on Goldmoney.com, Alasdair Macleod provides an analysis on what is actually about to happen with Basel III and his view on the potential impact on the gold market. Below I have pasted in the conclusion paragraph from the article. 

I would encourage readers to follow this issue and listen to a variety of points of view on the potential impact. It won't be long until the rules take effect if the deadlines are not extended. We will know soon enough if there is a significant impact on the gold (and silver) price or not.

Conclusion

"Changes proposed in Basel 3 mark the end of an era for derivative trading, when almost all gold and silver trading has been in unallocated form. The consequences for precious metals markets and prices should not be ignored or underestimated. The implications are understood by the LBMA, and their response to the UK regulator reflects their helplessness in the face of these changes.

The joint submission by the LBMA and the WGC is economical with the facts by avoiding an admission that unallocated and allocated gold accounts are completely separate businesses. The origin of the former is through the creation of bank credit. And with all banks operating through credit expansion no physical gold is involved. Dealings are entirely in unallocated notional bullion, with the gold price serving as a valuation reference point. While the creation of unallocated gold through bank credit is one thing, customer demands for settlement in the physical are another, and generally discouraged. But over the years demand for physical has absorbed physical bullion supply and additional leasing of central bank gold, adding a second but entirely different problem for bullion banks.

The remaining pool of available physical gold is relatively small when central bank, ETF and privately owned bars are allowed for in vaulting totals. True liquidity is not the headline 9,461 tonnes in London vaults, trumpeted by the LBMA, but is minimal — probably just a few hundred tonnes. It is from this small pool that daily imbalances in unallocated settlements which arise from delivery demands are satisfied.

There is never a good time to introduce such radical changes into long-established market practices. But with issuers of fiat currencies debasing them at an accelerating rate, bullion banks face considerable difficulties unwinding their unallocated positions at a time when public demand for physical bullion is increasingly responding to fiat money inflation, spinning out of control."

Please click here to read the full article on Goldmoney.com

Added note: 5-30-2021 -  New Deep Dive Interview with Alasdair Macleod on Basel 3. This is a very detailed explanation 0f the Basel 3 rules for gold and his assessment of the potential impact.

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