MarketWatch Article on Basel 3 and Gold



Until now, most articles on the potential impact of Basel 3 on the gold market in the next few months have been on alternative media sites. Now Marketwatch has published this article by Myra P. Saefong on the topic. The article is a pretty well balanced summary of the various views on what the potential impact on the gold price will be. Below are a couple of excerpts from the article and then a few added comments.

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"New banking rules, part of a sweeping international accord known as Basel III, will come into effect on Monday and mark a big change for European banks and their dealings with gold — potentially altering the landscape for precious metal demand and prices."

. . . . 

"Under the new rules, paper gold would be classified as more risky than physical gold, and no longer counted as an asset equal to gold bars or coins."

. . . . 

"Analysts, meanwhile, differ greatly when it comes to their options on the impact of Basel III and its NSFR requirements on the gold market.

Goldmoney’s (Alasdair) Macleod expects banks to be “discouraged” from dealings in gold forward contracts in London and in futures contracts on Comex.

. . . .

"These new changes also come at a time of accelerated monetary inflation and it’s “very likely” that the combination of the two events “will drive price higher,” Macleod said.  . . . ."

. . . . .

"(Ross)Norman (Metals Daily), however, thinks the new rules will “not have any significant effect on gold prices…only on the cost of dealings in these markets.”

Please click here to read the full article on Marketwatch

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My added comments: This event has been much discussed for months with analysts such as Alasdair Macleod (quoted in this article) and London metals trader Andrew Maguire arguing this change will cause a sharp rise in gold prices in the 2nd half of 2021. Others, such as Ross Norman (also quoted in the article) don't see an impact on the price of gold, but rather just a shrinking of overall gold related trading. Earlier this year I asked Jim Rickards what he thought and he told me he did not think this change will have a major impact on the gold price, although he is bullish on gold going forward.

What to watch for: One thing most agree on is that this change will greatly reduce the trading of so called "paper gold" in the form of various gold derivatives such as futures and options contracts. Since the cost of that trading will go up significantly, it's reasonable to forecast the paper trading volume will shrink. The question is -- Will this lead to more gold market participants buying actual physical gold  OR will they just retreat from the market altogether with little or no impact on demand for actual physical gold?  We should watch to see how that plays out.

For a long time, some gold bulls have complained that all the paper gold trading was used to help suppress the price of gold since gold sellers were not required to own actual physical gold to sell "paper gold" derivative contracts. So, over the next six months, we will get a real world test of that theory. Will this lead to a significant increase in demand for actual physical gold that puts upward pressure on gold and silver prices? We'll see.

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