by Turd Ferguson, TF Metals Report:
We all felt sucker-punched two weeks ago when the Prudential Regulation Authority of The Bank of England seemed to throw a lifeline to the LBMA and possibly exempt the Gold Pricing Cartel from the capital requirements of Basel III. However, after some digging and thought, our friend Alasdair Macleod is here today to explain how and why this is not the case and that the Basel III rules likely still foreshadow a move toward a London market that is more physically-backed and less reliant upon the fun-and-games of unallocated and derivative gold.
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First of all, Alasdair wrote a great summary last week on this issue. If you’ve not yet read it, you should do so now: https://www.goldmoney.com/research/goldmoney-insights/lbma-gets-a-lifeline
In my notes, I grabbed screenshots of the relevant sections. See below:
As Alasdair explains, after January 1, 2022, if a Bullion Bank wants to persist in their unallocated account trading schemes, they are going to face a substantial financial/capital penalty to do so. Some likely will pay that price, at least initially. However, over the long term, a Bullion Bank will eventually find it more palatable to fully back with physical metal each and every ounce of unallocated gold that they maintain on their books.
This forces a deleverage of the Bank positions and that’s precisely what we’ve always hoped for as a deleveraged system is much closer to a physical system than anything that the LBMA runs today. Additionally, forcing Banks to deleverage is consistent with what Andy Maguire told us a year ago regarding his meeting with Andrew Bailey, the current head of the BoE who was, at the time, head of England’s Financial Conduct Authority (FCA).