Basel III: Causing Gold’s Volatility?
Tom welcomes a seasoned group of experts on the gold markets to discuss the upcoming Basel III changes to banking regulations and their potential impact. We are joined by Bob Coleman, Vincent Lanci, Adrian Day, and Keith Weiner.
Keith discusses the reasons for the Basel III regulation in stabilizing the banking system. He argues these regulations will cause banks to be increasingly reluctant to participate in the gold business because of increased costs. As a result, some of these costs will be passed on and enter the retail markets.
Bob notes that banks have been abandoning commodity trading desks for some time. This is a takeover by the physical markets of the paper markets. As a result, metals are moving into stronger hands, resulting in higher volatility, but this is not necessarily a bad thing.
The LBMA has an extension on implementation and would prefer to be exempted from the Basel III regulations. The LBMA may disappear if they have to comply with all these requirements. They have been arguing that there is no default risk with gold.
These rules tighten up the market and may increase supply issues for those in the markets. However, with fewer players, there may be more direct price discovery. In addition, the costs of hedging will rise, and this may kill off some of the marginal players in the industry. When government intrudes into a market, they add extra friction, resulting in fewer transactions, and those on the margin are often forced out.
Adrian argues that banks aren’t likely to acquire gold due to Basel III, contrary to many opinions of so-called experts in the gold space. Banks have lots of options in the tier one assets they can hold, and most banks today have large excess reserves already.
Bob discusses the possible impacts on the US dollar with these regulations. Since late February, there has been a lot of activity in the Repo markets where the bond markets started to crack. He believes they may be deliberately trying to reduce counterparty risk by deleveraging gold.
Keith argues that the central bankers fall more into the category of “don’t attribute to malice or forethought what can be explained by incompetence, negligence, stupidity or academic bias.” These people only talk to themselves, and they are all academics. There are no businessmen on the board of the Federal Reserve. Vincent says, “Bankers are not going to be caught flat-footed. They have delayed Basel repeatedly. We are now in the perfect environment to implement it because they are awash in liqudity.”
Recent moves in gold have seen a move from weak hands to stronger hands. Adrian says, “The recent Fed news stories should have been headlined “Fed won’t raise rates for two years.” Instead, this market is reacting to thinner volumes, thinner exposure, and we now have a Fed that is beginning to say they will tighten.
Recent volatility in gold is due to funds exiting and is primarily futures-driven. They can manipulate short-term swings, but the long-term trend is more printing and much higher metals prices.
Adrian generally applies Occam’s razor to the world at large. When it comes to outlandish theories, the simplest explanation is likely the correct one.
Unallocated gold at the bank is not your asset; it’s the bank’s asset. If you are buying gold as insurance, the last thing you want is unallocated gold. Instead, hold and own physical metal yourself or at a depository in your name.
Time Stamp References:
0:00 – Introductions
1:14 – Basel III & Gold
5:15 – Good For Gold?
10:16 – LBMA & Basel III
13:48 – 85% Reserves?
17:14 – Tying it Together
23:15 – Not A Surprise
24:36 – Gold Deliveries
27:22 – Refiners & Comex
28:36 – Dollar Effects
38:24 – Golds Recent Moves
44:45 – Gold Basis Chart
50:00 – Recent Volatility
1:00:47 – Geopolitical Issues
1:05:02 – Unallocated Gold & Risk
1:09:26 – Final Thoughts
Talking Points From This Episode
- Basel III Regulations and potential impacts on banks and gold markets.
- Regulation costs may be passed onto retail investors.
- Thoughts on recent volatility in the gold markets and the dollar.
- Risks with treating unallocated gold investments as insurance.
Adrian Day is considered a pioneer in promoting the benefits of global investing in this country. A native of London, after graduating with honors from the London School of Economics, Mr. Day spent many years as a financial investment writer, where he gained a large following for his expertise in searching out unusual investment opportunities around the world. He is President & CEO of Adrian Day Asset Management. He has also authored two books on global investing: International Investment Opportunities: How and Where to Invest Overseas Successfully and Investing Without Borders.
Bob Coleman is a Registered Investment Advisor since 1992. In 2001, he founded Profits Plus Capital Management, LLC (RIA) and Dollars and Sense Growth Fund. Recognizing the necessity for physical metal storage, he founded Idaho Armored Vaults and Gold Silver Vault in 2008. They are a distinguished and respected leader in the precious metals industry specializing in storage, transportation, shipping logistics, and security.
Keith Weiner earned his Ph.D. from the (non-accredited) New Austrian School of Economics. He speaks worldwide about the failing dollar system and the need to rediscover the gold standard. To this end, He founded the Gold Standard Institute USA and Monetary Metals. The former is a nonprofit focused on education and outreach. The latter makes it profitable to invest in the gold standard by paying gold interest on gold. Previously, Keith founded DiamondWare, a voice technology company that he sold to Nortel Networks in 2008.
Vincent Lanci is the Owner and Founder of Echobay Partners LLC. and is a regular contributor on ZeroHedge. In 2018 Vince was honored to be a part of Market Wizard Larry Benedict’s Opportunistic Trader project as precious metals and Option expert. In 2017 Mr. Lanci and Professor Robert Biolsi co-authored Forecasting Oil and Natural Gas Volatility for UCONN.
From 2004-2008, Mr. Lanci was Co-Head of Metals & Energy Trading for CiS Options LLC, Echobay’s predecessor, where he ran the long-short and vol-arb portfolios for CiS’s parent fund and generated $103MM during that time. From 1993-2003 Vince owned and operated Berard Capital LLC option market makers. In 2000 he co-founded Whentech with David Wender, where he was chief architect of “Pit-Trader” user interface. Between 1987-1993 he gained experience at Lehman Bros and Cooper Neff. Mr. Lanci contributes to Zerohedge, BBG, and RTRS. He has paneled Mondo Visione, NYC Mines & Money conferences, and is a champion of level investor playing fields.