There are some weeks, like the one just ended, when the basic metrics shown here every week don’t make any sense. Stocks and commodities rising should be bearish for U.S. Treasuries, but this week, long-dated Treasuries rose! But then you realize that markets are rigged at their very core with a bias toward paper assets. Speaking of paper assets, it seems that one paper market, namely that for gold and silver futures, may no longer be viable for the bullion banks if Basel III regulations hold up. This will be a topic that I discuss with Alasdair Macleod on my radio show next week. The idea is that since Basel III will no longer allow banks to count futures contracts as make-believe gold on the asset side of their balance sheets, they will have to allocate substantial amounts of capital
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There are some weeks, like the one just ended, when the basic metrics shown here every week don’t make any sense. Stocks and commodities rising should be bearish for U.S. Treasuries, but this week, long-dated Treasuries rose! But then you realize that markets are rigged at their very core with a bias toward paper assets.
Speaking of paper assets, it seems that one paper market, namely that for gold and silver futures, may no longer be viable for the bullion banks if Basel III regulations hold up. This will be a topic that I discuss with Alasdair Macleod on my radio show next week. The idea is that since Basel III will no longer allow banks to count futures contracts as make-believe gold on the asset side of their balance sheets, they will have to allocate substantial amounts of capital that they previously did not need to allocate when those futures contracts were considered actual metal. In theory, that should restrict the bullion banks from using massive amounts of futures sales to distort the price of these markets. That should mean that the futures market sales should be limited to the sellers of metal, most notably gold and silver miners and recyclers, and on the buy side, jewelry producers and manufacturers who use the metals, as well as investors who want to buy and hold the metal. This regulation is due to begin on June 24 for European banks and by the end of 2021 for British banks. In theory this seems to mean that gold will rise considerably higher, but will it actually do so? There is some thinking that that may not be the case. Alasdair is one who thinks it will lead to a major breakout for gold at least against the dollar.
Will this mean that gold and silver are heading for substantially higher prices? That will be the main question I ask Alasdair about when I talk to him on my show on Tuesday, June 8. I would strongly suggest reading these articles that were written by Alasdair over the past four weeks: The end of the LBMA is nigh (5/13), The end of paper gold and silver markets (5/20), Suffering a sea-change (5/27), and The Geopolitics of Gold (6/3). You can find all of Alasdair’s weighty missives at the GoldMoney website, https://www.goldmoney.com/research/goldmoney-insights.
As you well know, Alasdair believes inflation is not transitory, which is contrary to the views that David Rosenberg expressed eloquently on my show last week. If you didn’t hear what David told me you can go to my YouTube channel at Jay Taylor Media. David points out that if you define inflation by the CPI, then the Fed Chairman Jay Powell is right in telling us inflation is transitory. But as David pointed out, not even PhD economists seem to know what inflation is. Personally, I look at inflation as a rise in the money supply, and that measure of inflation is going exponential. Where that money goes is another question. Pretty much since the stock market crash of 1987, money has been flowing into financial assets and real estate as a direct result of massive printing press money that has served to deny price discovery of capital so as to orchestrate bubbles in those markets. I believe my Inflation/Deflation Watch (IDW) is telling a more truthful story about inflation than the CPI is and as you will note it just made another high this week to 189.17.
A bubble bursting like that of 2008 is certainly possible, in which the CPI would be knocked out once again. David Rosenberg points out that productivity is rising faster than wages, massive debt is a headwind against inflation, and that velocity continues to fall. So, I believe as long as the existing global monetary system remains intact, the deflationary side of the inflation/deflation argument can remain in place as long as you define inflation by the CPI, which is very much an artificial construct for government propaganda purposes.
But Alasdair and others argue that the continuation of the dollar as the world’s reserve currency is very much in doubt and he points to Basel III changes as potentially an unwitting accomplice to a massive decline in the importance of the dollar at the same time that we witness the ascension of China and its currency on the world stage. Here is an overview of Alasdair’s June 3 article, titled, “The geopolitics of gold.”
“A number of events are coming together which are set to push gold prices higher. Besides a combination of continuing inflationary policies and massive future budget deficits undermining the dollar, by closing down derivative market activities new Basel 3 regulations appear set to deflect some demand into physical metals. Furthermore, liquidity in gold markets will contract, potentially making prices more volatile.
“This article looks at how these developments will affect the undeclared but very real financial and propaganda war being waged by America against China. China is moving on, enlarging its own middle class which will benefit from a stronger yuan, much as the German and Japanese economies did between 1970—2000. Having dominated economic developments until now, the export trade is becoming less important. With this dependency lessening, the argument in favour of a coup de grace against the dollar by China revealing its true gold position is increasing.
“In this article, China’s undeclared gold reserves are quantified, and we can be confident that China has at least 20,000 tonnes “off balance sheet”. For China to openly declare her gold position always was her final, almost nuclear option in the financial war waged against her by America. Unwittingly, by diverting demand from paper gold to physical bullion, Basel 3 may have brought forward that day by default.”
The first paragraph of the introduction states the following: The imminent introduction of Basel 3’s net stable funding ratio is going to have a major impact on the global banking system, and it is a reasonable assumption that government agencies concerned with geopolitical implications will be considering it from that point of view. And nowhere is this more important than for gold, and by implication the dollar’s unrivalled hegemony.
June 24 is coming up in 14 business days. We shall see if this is an earth-shattering financial/geopolitical event or just more wishful thinking on the part of gold bugs looking forward to getting rich. Whatever that outcome, it’s clear that gold is beginning the next leg higher and perhaps the blow-off phase of this bull market that began in 2016. And I’m convinced this is the gold bull market of a lifetime, especially for the gold mining sector as well.