For years, analysts of the precious metals market have argued that large financial institutions were able to dominate gold and especially silver pricing through highly leveraged trading on commodities exchanges. Essentially, creating enormous synthetic gold exposure with little-to-no physical metal behind it.
Whether you call it hedging, financial engineering, or (in some documented cases) outrightmanipulationone thing is undeniable: The structure of the commodities markets haslongfavored institutions that have access to cheap, short-term funding and massive balance sheets to draw from.
TRUTH LIVES on athttps://sgtreport.tv/
Basel III changes that equation. (See Peter Reagan’s analysis ofBasel III and goldfor additional background.)
Today I want to explain one specific way in which the new Basel III regulations may already be shaping metals markets. Not with a dramatic headline.
But with something far more consequential: Capital rules and funding discipline.
Like big banks themselves, Basel III is mostly about two things:Capitalandrisk.
Many analysts took note of the “zero risk” rule applied to physical gold bullion. Properly structured physical gold can receive a0% credit risk weightingin many jurisdictions. That means banks are not required to set aside additional capital against it to compensate for hypothetical credit-risk purposes. From a balance-sheet perspective, physical bullion is treated as carrying no counterparty credit risk.
Commodities contracts are a different story.
Gold-based financial derivatives, forwards, swaps and so on represent financial claims. They introduce counterparty risk. While these instruments remain legal and widely used, they are not given the same privileged credit risk weighting. That distinction alone shifts incentives.
Source: SGT Report
