The Bank of International Settlements created new regulations following the collapse of Lehman Brothers to stop banks from reckless lending and a repeat of the ensuing financial collapse. Having carried out regulations previously through Basel I and Basel II, Basel III rules are pages and pages of jargon and waffle; however, the salient points that we need to consider are the Net Stable Funding Ratio and how this relates to banks and their balance sheets.
The Net Stable Funding Ratio is the available amount of stable funding divided by the required amount. This must be equal to or greater than 100%. Put, you cannot lend more than you own.
Banks have two sides to their balance sheets – assets and liabilities. On the assets side, amongst other things, are tier 1 assets. As the name suggests, these are zero-risk tangible assets valued at 100% of their value.
These are cash, treasuries, and now physical gold. Paper gold or any unallocated gold is not classified as a tier 1 and hence would need to be "topped up" with cash reserves to make it 100%. This is critical to understand. A leaflet in your vault claiming gold ownership cannot be rated at 100% cash value, and therefore is not classed as tier 1, whereas physical gold now is.
On June 28, Europe (Excluding the UK), the USA, and the Comex became Basel III NSFR compliant. The UK and the LBMA, who have fought this for nearly a decade, were given a further six-month extension until Jan. 1, 2022, to be NSFR compliant.
What Does This Mean For Gold?
It, of course, raises several serious questions.
- Why would the LBMA, which deals almost exclusively in unallocated gold, be so heavily against the implementation of the NSFR?
- Have central banks been front running this and been buying physical gold for the last few years at a greater rate than we have seen for decades?
- If physical gold can be rated as a tier 1 and given point two, wouldn't it be in banks' interest for the price of gold to go up?
Jeff Christian's testimony at a CFTC hearing admitted that for every one oz of physical gold, there are 100 paper derivatives. silver is said to be three times as bad. This means that significant players in precious metals trading have had huge, short positions on the metals as they drive the price down to accumulate physical at cheaper price levels.
This means that bullion desks are buying and selling more gold and silver than they can deliver. This is all part of a fractional reserve Ponzi scheme that has been going on for years under the noses of the regulators operated by the too big to fail – and clearly, be properly prosecuted – banks.
What happens on futures markets is the tip of an iceberg as other ways to trade gold consist of over-the-counter derivatives (OTC), which are multiples larger in outstanding obligations. They consist of forwards, loans, swaps, leases, and options and are classed as liabilities on the bank's balance sheets. This is why the paper gold market is a farce because it is nearly impossible to delve into the data to find regulation there.
Comex And LBMA
Recently, some well-known silver enthusiasts in the US, backed by some slick financing, tried to buy five 1000oz silver bars from the Comex. After weeks and weeks of excuses, emails, misinformation, and deflection, they received a warrant to five 1000 oz bars.
This is not physical silver which is still yet to be delivered. Bear in mind this is a futures contract, so the delivery should have been at the end of the month, as a rollover was never requested. This warrant was not tagged with bar marks, and it is unknown whether this is rehypothecated. Until you receive physical bullion, you do not own it. One wonders how many claims there are to these bars.
The LBMA appears equally as frustrating. They openly admit that 95% of their trading is paper contracts, and they are seven times the size of the Comex in volume traded daily.
Bottom line? Neither are set up as delivery markets and given the stress tests of banks even at this late stage, there is potential for both to implode if "owners" of all bars were to call in for delivery, it would be impossible for both to satisfy this and both exchanges would push through a cash settlement as the only option.
In July 2021, just a matter of weeks after the rest of the world became compliant, the Bank of England's Regulatory Authority allowed their bullion banks to apply for an exemption reducing the size of the required capital buffer.
This is open to interpretation, isn't quantifiable, and doesn't confirm any exemption would be granted. What is extremely interesting is this new story has gone very quiet. In an article I wrote on the subject, I questioned whether the rest of the world would sit back and allow this to happen given they had to comply, and I suspect a lot of behind-the-scenes jostling has taken place. As part of the LBMA, Scotia bank has already closed its bullion desk.
Present Day Price Action
We aren't in the camp that every time gold and silver go down in price; it is manipulation – far from it. However, those that claim these markets are not manipulated need to research the fines that have been dished out over the years for spoofing and manipulating prices. Lawsuits against some big banks exist to this day.
So if Europe (minus the UK) and the US are Basel III and NSFR compliant, why are we still seeing smackdowns on the metals where we see numbers on delivery of selling that are impossible to deliver? The simple answer is they must still be going through the 'back door' via London to complete these questionable transactions.
Here's an interesting statistic, less than 1% of traders across the globe hold physical gold. If that doubles (and history has shown much higher percentages), how will bullion desks cope, and what will happen to the price? They won't be able to cope is the answer, they will run out of physical metal, and we will see price discovery. One can only ponder the metals' price if these exchanges didn't' exist.
NSFR Date for the UK – Jan. 1 2022
To clarify the confusion here, the NSFR is the most critical aspect of Basel III regulations for metals investors (I'm' assuming the majority of readers here are holders of physical, hence investors, not traders – easy distinction). This January date is when the UK must be compliant.
It is also essential to understand that the NSFR is a massive aspect of this change, but only a tiny part of how banks can finance. The big question is, will the rules be enforced, and do these bullion desks have a way around it. Given how they have gotten away with it for years, one must ponder how different this would be. There is, of course, a very, very large caveat to this.
Through smashing paper price and accumulating physical, the result at some point will be supply and demand problems when metals become difficult to source. Higher prices are the end game for these organizations.
The world's central banks buying at these prices is in preparation for the only tier 1 asset on their balance sheets that, unlike fiat currency, will not be intentionally debased by governments with their loose monetary policy we have seen now for years.
They have sold paper and bought physical to be better positioned than anyone else to make huge profits from the upside price, which sits just around the corner. Is it any wonder that ICBC, one of China's largest trading on the LBMA, recently bought Barclay's' two-tonne capacity vault in London.
China hasn't' been discreet in placing gold on a pedestal. It would be difficult to fathom how they would have sanctioned a UK exemption having the largest store of gold on Earth.
To Summarize
The reclassification of gold was sanctioned by the highest levels of government and authorities across the globe. This suggests one of two things. Either they do not believe that a rising gold price threatens fiat currencies, or this is all part of a plan to have gold at the center of whatever is coming when fiat currencies fail.
There's been a lot of speculation on what that is. If the former is the case, they will have totally underestimated history and what gold is and always has been – sound money. We don't' believe this could have been so brazenly overlooked. One thing is for sure, though, and that is when this paper game blows up, it will blow big, and it could render an awful lot of big names in trouble.
As a juncture, milestone, and turning point, the start of a new year would be the ideal opportunity for a price reversion event. We must remember that the world agreed to these new regulations, and with debt levels skyrocketing, the world needs them.
Make no mistake, though; we fully expect some horrible-looking price action in the coming weeks – which we didn't' expect six months ago. There weren't' many that predicted a lower gold price at the end of 2021 than at the start. We still believe there are many naked short positions left on the futures markets. The end of the month could be a riot as we see an undignified last-minute scramble to unwind and cover shorts.
Could this be the final chance for a generational buying opportunity? We still think so.