The Basel III Compliance and Unwinding of the Legacy: A Turning Point in the Gold Market
The opening of the 2023 trading year marked a historic moment in the world of finance, as the multi-trillion-dollar spot gold market, leveraged at a ratio of 100:1, became Basel III compliant for the first time in over 50 years. This significant development compelled global liquidity providers and LBMA market makers to secure their traded foreign exchange gold positions, whether long or short, with physical gold bullion. The impact was profound, leading to a transformation of the once non-compliant spot gold market, now settling within two days upon reaching London.
The shift also brought to light a significant disparity between the compliant London markets and the non-compliant US-centric Comex futures markets. While the former adapted to the new regulations, the latter remained siloed, preventing US traders from directly accessing the physically settled global spot gold foreign exchange markets available to the rest of the world. Consequently, US traders were left with cash-settled gold paper warrants, lacking the backing of physical gold.
This discrepancy presented unique opportunities amid a highly leveraged environment, wherein billions of dollars of daily siloed US trades continued within the rigged Comex futures exchange. As this house-controlled system was sustained, a disconnect between paper and physical gold persisted. Nevertheless, beneath the surface, a rapidly closing price anomaly emerged, offering a once-in-a-lifetime chance to capitalize on grossly undervalued gold prices.
To put this into perspective, an astounding ten million ounces of Comex gold were traded on a typical day, amounting to synthetic derivative gold valued at nineteen billion. This environment allowed the Comex market to influence physical gold prices and retain control for an extended period. However, the process of deleveraging has now commenced.
While the Comex market pricing mechanism has not fully aligned with Basel III requirements, a window of opportunity has presented itself, exposing a little-known backdoor for global markets to convert undervalued cash-settled future positions into assets that comply with the net stable funding ratio. This compliance would enable participation in the global delivery market.
Curiously, many Commodity Trading Advisors (CTAs) in the US seem unaware of, or are barred from accessing, this exchange for a physical mechanism that we are drawing attention to. In contrast, global central bank sovereigns and non-US traders are seizing this opportunity to acquire future positions, exchanging their depreciating dollars for physical bullion as it emerges from the legacy paper market with its diluted pricing mechanism.
The multi-trillion-dollar spot gold market’s Basel III compliance signifies a watershed event in the world of finance. As the legacy unravels, the discrepancies between compliant and non-compliant markets present possibilities for both investors and traders. The transition towards net stable funding ratio compliance opens the door to a more stable and transparent gold market, allowing global actors to recognize and capitalize on gold’s true value.
Russia, China, the BRICs, plus the SEO, and an increasing number of African Nations are publicly adding publicized on record gold purchases to assist this gold back trade. This is the material that the Bloomberg’s of the World list. Furthermore, they are increasing their unpublished off-the-record monetary gold reserves in order to hedge and benchmark their individual currencies against what is essentially an overvalued quickly depreciating debasing dollar. While the PBOC has recently officially documented its eighth consecutive month of official gold purchases in June, and we will soon see the July report, that follows one hundred tonnes of official PBOC gold buying in the first seven trading days of 2023. These official purchases are significant in comparison to unofficial monetary gold purchases, which are not required to be recorded. Also, the Financial Times, which is not a fan of gold, verified last week that a growing number of central banks are bringing their physical gold holdings back home to avoid Russian-style penalties on their foreign assets. What they are stating is that although expanding their purchases of precious metals as a hedge against excessive inflation, it also confirms that these purchases are in tangible form, noting that the exchange, the ETFs, are being redeemed.
What is apparent is that officially reported central bank gold demand, when it is ultimately reported, will outnumber all 2020s documented over fifty years of record physical demand levels by a factor of two to three. While undocumented third-party demand feeding this trade will, at the very least, force the unwind of leverage, driving the gold price significantly higher. It’s critical to note that, as powerful as they have been in fighting the increasing gold price, the LBMA CME coalition was formed back in 2020, when we had that tremendous AFP blow-up. The ‘cartel,’ as we call it, has no control over off-grid demand, and while they focus on ring-fencing the billions of dollars of corralled US-centric flow inside this Comex exchange, the related net stable funding-compliant gold fixed benchmarks in London are far too low to match real plain vanilla supply and demand fundamentals. anything occurs in London and anything we repair is genuinely deliverable. This results in increasingly large arbitrable physical gold outflows, which eventually expand Comex leverage to increasingly nosebleed levels, with an increasing number of central banks refusing to buy counterparty risk non-compliant ETF gold, while, as the FT admits, converting derivative gold positions into billions.
It’s depleting the Comex open interest, or Comex chips, as we call them. As we approach 2023, these synthetic price reduction tactics will rapidly backfire. This is why every top-tier bullion bank buys actual gold for its own accounts. What is not immediately obvious outside of this compartmentalized Comex bubble, which only exists because the Fed has imprisoned US gold and silver traders inside it? Every single worldwide central bank, without exception, is publicly on record and otherwise purchasing physical bullion in unprecedented quantities, capitalizing on this synthetic legacy price, and there’s nothing stopping US citizens from doing the same. That’s something we’re starting to see more of. This window of opportunity to profit from the paper-to-physical gold gap will not be open for long.