This is because Basel III includes the new Net Stable Funding Ratio (NSFR) requirement, which specifies that an 85% Required Stable Funding (RSF) needs to be held by banks against the financing and clearing of precious metals transactions. This is a big change from the pre-Basel III level of 0%, and it makes holding unallocated gold more expensive by equating it to the same level of risk as holding equities.

" Basel III requires banks or dealers to collateralize 85% of the value of their unallocated gold with a Tier 1 asset, which is cash,"  

For example, if a bank has $1 billion in gold positions, with $300 million in allocated gold and the other $700 million in unallocated gold. Before Basel III, the bank didn' t have to put any collateral for those positions. But with Basel III, the $300 million positions in allocated gold are fine. But the $700 million positions in unallocated gold are now considered risky as equities and are put in the same risk category.

" Under Basel III, the bank would have to show that 85% of this $700 million is actually sitting on their balance sheet, and the bank is not touching it," Carrasco explained. " That has a tremendous cost of finance. The bullion banks need to find 85% of the nominal value of their unallocated gold position and fund it."

The risk here is that trading unallocated gold would become a money-losing business.

" Banks cannot continue charging practically no fees on unallocated gold. They have to increase their price by 100 times? Will clients be interested in trading at those prices.The risk is going to be a lot of banks shutting down because suddenly it is a money-losing business. That is Basel III in a nutshell."

Allocated vs. unallocated gold

Understanding the difference between allocated and unallocated gold is critical here.

Allocated gold is when a customer buys physical gold that has already been minted, and it is physically sitting in a vault. And that gold belongs directly to the customer.

" It is the only gold that truly belongs to the buyer with proof of ownership," Carrasco said.

Unallocated gold is like a form of credit. Unallocated gold doesn' t have to be in a vault, 

Unallocated gold can be sold 20 times to 20 people, whereas allocated gold can only be sold once. " That is the systemic risk that Basel III is worried about," she noted.

What these changes mean for gold is that the demand for physical gold will likely increase, putting the squeeze on liquidity, which in response is likely to trigger a rise in prices. If there is an increase in demand, there will be a liquidity squeeze

Just in London alone, the amount of unallocated gold traded on a daily basis is around $200 billion a day.

Many  experts are  targeting a minimum  price  of  $2,100 an ounce by year end or earlier(some say October).

Allocated gold is finite(there is a limit to the amount of gold) and the unallocated gold is infinite(no limit, same as currency you can print and print).

If people turn to allocated gold, liquidity will be squeezed and price will go up

 

ReplyForward