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.
https://www.zerohedge.com/markets/macleod-end-lbma-nigh
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.
https://www.zerohedge.com/markets/macleod-end-lbma-nigh
(post is archived)