The End of Paper Gold And Silver Markets

• The End of Paper Gold And Silver Markets
  by Alasdair Macleod, https://www.goldmoney.com/
  This article looks at the likely consequences of the Bank for International Settlements’ introduction of the net stable funding requirement (NSFR) for bank balance sheets, insofar as they apply to their positions in gold, silver and other commodity markets.
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  If they are introduced as proposed, banks will face significant financing penalties for taking trading positions in derivatives. The problem is particularly important for the London gold market, as described in last week’s article on this subject. Therefore they are likely to withdraw from providing derivative liquidity and associated services.
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  This article delves into the consequences of the NSFR leading to the end of the London forward markets in gold and silver. Replacement demand for physical metal appears bound to rise, and an assessment is therefore made of available gold not tied up in jewellery and industrial uses. An analysis of gold leasing by central banks, leading to double ownership of physical gold, is included.
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  The conclusion is that unless the BIS has an ulterior motive to trigger a chaotic financial reset of some sort, it is a case of regulators not understanding the market consequences of their actions.
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  Introduction
  Last week I explained why as they stand the new Basel 3 regulations will make it uneconomic for banks to continue to run bullion trading desks.[i] The introduction of the net stable funding requirement (NSFR) means that mainland European banks, of which ten are LBMA members including the Swiss, will have to comply with the new regulations from the end of June, and all UK banks, in effect the entire banking membership of the London Bullion Market Association (LBMA) will have to comply by the year-end. There are 43 LBMA members listed as banks, and on Comex there are currently 17 with long and 27 with short positions in the Swaps category, which represent bullion bank trading desks in the dominant futures contracts. So being similar, the Comex numbers must broadly replicate those operating in London. It is therefore reasonable to assume that if the LBMA’s banking membership ceases dealings in unallocated bullion, then very few will continue to deal on Comex — the LBMA crowd having ceased taking trading positions.
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  We are discussing not gold or silver but their derivatives. But there is a problem borne out of the LBMA’s insistence that it involves bullion, albeit unallocated, and not derivatives. The distinction could be important, depending on how the UK regulator applies the NSFR rules. This is because in the calculation of required stable funding, gold consumes 85% of available stable funding while gold liabilities contribute no available stable funding at all. The effect is to impart a negative factor into a bank’s overall net stable funding calculation, making unallocated gold trading hopelessly uneconomic in terms of deployment of total funding capital. The alternative, which does not appear to be under the LBMA’s consideration, is to admit that the whole unallocated gold trading business has nothing to do with gold bullion but is in fact gold derivatives; in which case capital funding penalties under the NSFR would be broadly limited to imbalances between derivative liabilities and derivative assets.
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  Consequently, it appears that an allocation backstop of 85% of available stable funding (ASF) must be swallowed in the case of gold, which does not appear to be the case if the LBMA confesses to the paper charade.[ii]
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  read more.

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