The End of Paper Gold & Silver Markets

The comments below are an edited and abridged synopsis of an article by Alasdair Macleod

This article looks at the likely consequences of the Bank for International Settlement’s introduction of the net stable funding requirement (NSFR) for bank balance sheets, insofar as they apply to its positions in gold, silver and other commodity markets.

The End of Paper Gold & Silver Markets | BullionBuzz | Nick's Top Six
Golden silver acrylic background. Element for different design. Paper gold & silver concept.

If the NSFR is introduced as proposed, banks will face significant financing penalties for taking trading positions in derivatives. The problem is particularly important for the London gold market, and it is likely to withdraw from providing derivative liquidity and associated services.

The article delves into the consequences of the NSFR leading to the end of the London forward markets in gold and silver. Replacement demand for physical metal appears bound to rise, and an assessment is made of available gold not tied up in jewellery and industrial uses. An analysis of gold leasing by central banks, leading to double ownership of physical gold, is included.

The conclusion: Unless the BIS has an ulterior motive to trigger a chaotic financial reset of some sort, it is a case of regulators not understanding the market consequences of their actions.

Up for discussion: Introduction; unknown motives and politics; quantifying gold derivatives; central bank leasing—yet to be resolved; the true quantity of monetary gold; and silver.

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