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I've copied below something I've just posted on another board when the topic of Basel III came up where others were expressing how they thought it would have an immediate impact on rising prices of precious metals.
...much as I'm a silver bug myself and would massively profit from rising prices, I think we need to exercise a little caution as to the immediate impact of Basel III.
Longer term it should allow the physical market to have a much bigger impact upon pricing metals than various unallocated paper derivatives. However it isn't a direct translation that Basel III will instantly kill the paper trade, it's merely a regulation governing how different assets can be valued to arrive at a bottom line on a balance sheet aimed at keeping banks solvent.
Silver, and to be honest gold, are both tiny markets compared to the huge sums that slosh around in bonds , Forex and equities. With the uncertain economic climate as it is at the minute many major banks are holding more and more free cash.
Don't assume that these banks will be rushing to buy physical metal over the next few days to cover their paper positions, some have enough free cash to double their paper positions in silver or gold should they have motive to without needing any more physical assets to balance their books, whilst others may just drift out of dealing with precious metals if the regulation becomes prohibitive, we've certainly see few bullion banks go already.
To play Devils advocate you could argue the end result of Basel III will simply be to massively increase premiums or spread on physical metals, making it more expensive to buy and less profitable to sell.... perhaps we've already been seeing this over the last several months in the run up?
I'm going to watch how things play out with interest, and as I say I do expect things to be positive for precious metals in the long run... I just like to present a counter opinion by way of maintaining balanced discussion, even if such views may be less popular with everyone here.
@Glittertip you would think so but "paper gold" is a derivative contract which is a multiple bet on the market. In a physical transaction you are buying and paying for each ounce of gold. With derivatives you can buy multiples [ x 10, x100] at a margin price so one would be very unlikely to take delivery as you would have to pay 100% for the basic number of ounces.
Therefore virtually all such contracts are closed out, if profitable, or lapse. So demand for physical gold in substitute for these contracts would not be great.
IVYBUSH, so if fake paper gold is removed and valueless then real physical gold would in theory soak up the pretend gold making it much more valuable, probably the reasoning behind China buying the lion shares of physical gold.
Fundamentally in a positive way. In future those wishing to invest in gold will have to hold the physical metal. How many will do so, rather than a paper bet, is clearly a guess. However it would no longer be possible for traders/banks to "go short" of gold and so a true supply/demand pricing structure will ensue.
As gold is seen by many as a finite "real value" asset not linked to countries/currencies and as there are many financial hazards [inflation/higher interest rates/tapering of QE etc] on the horizon it seems to me that gold has a positive future.
As for ECR, the current drilling programme has a very good chance of success. The next 18 months or so could well see turmoil in dollar outlook, to the benefit of gold. Many will hedge accordingly imv. So with sufficient funds to finance our near term prospecting, we are in a good position.
The BIS has stipulated a change in bank reserve assets and down graded "Paper Gold" contracts so it becomes unprofitable to hold them beyond end June. The discussions on Basel 3 have been ongoing for many years. Most if not all of these forward sale contracts do not have convertibility into physical metal. The estimates for total amount of trades vary but conservatively many billions of dollars, thus creating a false market in gold to the advantage of the US and the FED.
I think Basel 3 is a voluntary arrangement , but if the big guys see a profit in it they will 'volunteer' . A lot of paper gold that far exceeds the actual gold supply by an unknown number . I suppose they can x5 and up on paper but unless it is called in physically then they can do that without repercussions . Paper is also easier to 'store' and transfer so costs less. I think most important is that China and Russia is moving out of the $ as a store of value and going into euro , yen and ahem, gold . Don't think anyone is fooled by the Fed claims about transitory inflation, treating everyone like fools it seems, or trying to!
All relevant trek , a different take on it here https://twitter.com/GlobalProTrader/status/1405898563385765891 "Call me a cynic but #Gold got hammered 8% straight down in just days before the second largest single opex in history. Did banks have options on the books that expire worthless around 1770-1800 and thereby they reap huge profits as Gold dumped? If so, look for rally next week."
I posted this yesterday is response to a question on another BB.
“Unfortunately the narrative is changing. The Fed have given hawkish hints which has spooked PM’s. Tapering is being discussed and interest rates may rise ‘sooner than expected’.
For sure with the 10year treasuries at 1.6 and the ‘average inflation’ at a tad over 4 it gives a net negative yield (-2.6%). But inflation is being imported hotter than expected due to the weak USD.
The soft US non farm payrolls are looking like a blip and the labour market is awash with vacancies hence the hawkish rhetoric.
I am hoping Jerome is just trying to talk up the dollar for now. If it’s more the markets WILL tank!”
It’s really playing out. Nerves may be settled after Jackson Hole but there are some big economic numbers out next week on Eurozone. Going to be another high vix week.
The question is how do you play it with the likes of ECR. Some folk may be moving into cash, especially from Bluechips but whilst smallcaps and notably explorers won’t be exempt from a retrace there will be exceptions, well at least some will hold up reasonable well.
If you knock up a mock portfolio of gold explorers/E&P/Tech etc on google finance you can see what companies and sectors are holding up and then fathom why. ECR has held up this week along with a few others. Why?
# SP is on its arse, not a reason on its own but it fits the current TA narrative of support/RSI - already oversold. I added to ADME today, similar scenario.
# Cash is not an issue - absolutely essential! No one wants to come to a falling risk off market to raise cash! The likelihood is you won’t get a good deal if any!
# News is due. Helps to stave off the ‘fk it I’ve had enough!’ emotions! That needs to be significant accretive events happening now, during said market turmoil so it’s enough to tempt and hold investors. There is always hot money!
# liquidity, who wants to be stuck in an illiquid stock now or one with 10% spreads!
# Autonomy - destiny in ones own hands. Especially in an inflationary/covid environment.
# Not for ECR but reporting in USD helps in these markets.
You could add many more reasons. These are not reasons to invest like BoD, significant shareholders etc etc these are a reason to stay invested in a sht storm!
If you chart POG v ECR SP you can see we have plenty of scope to ride that albeit sentiment will undoubtedly have an impact. Any further discovery or JV will be as significant at $16 as $1700.
As for Basel 3, it will be interesting to see what happens. Having researched more I can argue for a positive and a negative impact on the POG. But for sure any paper positional unwinding will be out the way at the next futures closure if not already done so as few would risk running it to the wire. It will probably be like ‘taking a pss in a dark suit. You get a warm feeling but nobody notices!’ Lol