What Basel III Might Mean for Gold Futures

If you regularly trade gold futures on a short-term basis, then you may not be following the broader gold market news.  There’s nothing wrong with that. However, if you want to keep an ear toward the big picture dynamics that may occasionally–and sometimes significantly–affect the precious metals markets, then this post is worth a read.

With that said, there are a lot of changes happening in the gold market as we speak. Lot’s of it has to do with inflation forecasts. But perhaps the biggest change that may affect the way gold is to be traded is less than two years away. It’s taking place on January 1, 2023, and it’s called the Basel III accord.

If all goes according to the “accord,” pardon the pun, then gold may never be the same as it was, at least since before 1971, when President Nixon sealed the coffin for the Gold Standard. If all of this sounds strange to you, let’s dive in and cover what Basel III is all about.

What is Basel III?  

According to the Bank of International Settlements, Basel III is an internationally agreed set of regulation, supervision, and risk management measures developed by the Basel Committee on Banking Supervision in response to the 2008 financial crisis.

It sounds boring already, but don’t fall asleep. Here’s the one critical aspect of its implementation: Under Basel III, gold will become a “Tier 1” asset.

…at national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection can be risk-weighted at 20%.

Source: Basel Framework, page 192

In addition to this, physical gold stored in banks will be valued at 100% of its quality and weight (in contrast to today’s 50% valuation).

In short, this means that “gold” will once again be recognized as “money.” And considering how “fiat currencies” may be subject to the whims of monetary policy–namely, “inflation”–you have to wonder whether banks will consider gold to be a more reliable reserve than currencies themselves.

So, if gold is once again recognized as “good as cash,” do you think that its official status and possibly its increasing accumulation as a monetary asset might be bullish for the yellow metal? If you trade gold, then this is something to think long and hard about, because it may be a game changer in the market.

That’s not the end of it. There’s more.

Paper Gold Manipulation May Be Ruled Out

An issue that “physical” gold and silver investors have had for some time is that both markets were heavily manipulated for years due to the amount of “paper” gold and silver in the market. There are many instances of market manipulation–from “spoofing” to selling “paper” metals promissory notes without buying the actual metal, to shorting the metals via paper. Google “precious metals market manipulation” and you’ll come across several instances of DOJ and CFTC cases where banks were charged with price manipulation in the metals market.

Such activities were made possible by the paper market. How large is the paper market? In a CFTC hearing in March 2010, metals industry expert Jeffrey Christian testified that the number of paper products being traded far exceeds he quantity of metal that’s actually owned.

In short, Basel III may be bullish for gold and silver, but the same can’t be said of gold and silver futures that are issued based on “unallocated” metals. Central banks and other investors are likely to raise their gold reserves, but in the physical metal, not the paper (and this may include ETFs as well).

The Bottom Line

This may not be the best news for futures traders who participate in the gold and silver market for short-term trades, but it’s important to bear in mind that a major potential change may take place. We’re alerting you as a critical early warning signal should Basel III–in its current form–advance to implementation.

 

 

Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations.  There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.