On Friday, July 9, headlines came out that the LBMA was exempt from the rules of Basel III. Like all headlines, however, there is always more to the story.
First off, this is not an exemption as yet. It is a guideline statement produced from somewhere inside the Bank of England, and at no point in any document does it state that this has been ratified by the BIS. The timing of this is, at best, extremely questionable having come out two weeks after the rest of the main players across the globe have had to comply with the new rules.
We will come on to that side of it a bit later.
The large banks involved in this are JPMorgan (NYSE:JPM), HSBC (NYSE:HSBC), ICBC Standard Bank, and UBS (NYSE:UBS), which claim to settle gold transactions worth around $30 billion a day.
The document released specifically referenced “metal in vaults.” The LBMA has fought back against these rules for 10 years as they tweeted, with their reasons stating they are unnecessary and could force some banks—including clearing banks—to stop trading. They have also fought back claiming it would reduce liquidity. I couldn’t agree more to both of their arguments. It most certainly would.
The statement from Sakhila Mirza, the LBMA's chief counsel reads sic:
The Bank of England's Prudential Regulatory Authority (PRA) has decided to amend its approach to precious metal holdings related to deposit taking and clearing activities by introducing an interdependent precious metals permission which would reduce the size of the required capital buffer. This is one of the key points that we've been asking for all these years, "Clearing will be exempt."
JPMorgan and HSBC, the two banks with the largest short positions on both gold and silver, declined to comment.
So what does this mean for gold price in the short term? If we look at the movement in price on the futures market following the June 28 and the July 1 dates (for Europe and US implementation of the NSFR respectively) there was no real change.
When we look at the open this morning, gold was still trading above $1800/oz. So these announcements have had little effect on the price point.
We must also question what this reduction in the “required capital buffer” is. Does it refer to the 85% hair cut valuation against unallocated gold, or is this something else?
Could this mean the LBMA is awarded a higher classification of unallocated gold on balance sheets than any other country? If fought, (and I’ve no doubt it will be) how is this argument of favoritism going to hold water?
Next and more importantly, I can hardly see the rest of the world accepting this. Let’s not forget the whole purpose of Basel III was to deleverage banks and stop the reckless balance sheet abuse that caused the financial collapse.
The LBMA deals almost exclusively in unallocated precious metals trading. This “metal in the vaults” nonsense isn’t fooling anyone. It has been widely stated that Russia and China—who are both heavily invested in the physical metal—had put pressure on the BIS to implement these rules.
Scotia bank already closed its doors because of these rules. There is too much compliance across the globe for a major hub to be given a lifeline without consequence.
So how does this now play out? Does the rest of the world accept the LBMA’s current position? Highly doubtful. Does the rest of the world go full circle and go back to dealing in unallocated gold as assets on their balance sheets in a two fingers up at the BIS, similar to what the LBMA are claiming to do?
Again, highly doubtful as that would abolish the entire Basel III deleveraging criteria (not just gold, this is other tangible assets as well) and make a complete mockery of the last 10 years. Furthermore, these rules are needed to overhaul a totally overleveraged and hanging by a credit thread banking sector.
There are many reasons to hold physical gold and silver, regardless of Basel III. Be under no illusions here; this is an early indicator only and not a full and final green light for the LBMA to claim they are exempt.
There are many reasons for the rest of the world to feel extremely aggrieved at this so I would suggest there is a long way to go before this is finalized.