Gold Market in Crisis, Risks Collapse: LBMA

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There, that got your attention. But is anyone really listening...?

Gold markets need gold, and that can only ever come out of a mine in the first place or come from a refinery when recycled, writes Adrian Ash of BullionVault, currently in Singapore attending the London Bullion Market Association's 2016 conference.

So a huge and critical business works to lend cash as well as gold bullion so that miners and refiners can finance production and source metal to sell.

That business – bullion banking – underpins the supply chain providing manufacturers, dealers and ultimately consumers with the gold they want to buy. And once again, this time in Singapore, that supply chain of bullion bankers, refiners and the other massed members of the LBMA find themselves at a truly 'decisive turning point', aka in crisis.

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Last year when the LBMA met for a conference in Vienna, the existential crisis had become plain and painful as sinking prices and a growing burden of regulation and regulatory costs drove key players to quit the gold market entirely.

Even with prices $100 higher per ounce 12 months later, the "unstoppable pipe" of regulation has continued dripping onto the gold bullion market, and the critical decisions affecting it are set to have a greater impact – risking "a collapse" in fact, to quote a press briefing by the LBMA's executive team this morning – if one seemingly small and boring little change to banking regulation goes ahead as planned.

Known as Basel III, the banking rules set to come into force by 2018, and starting over coming months, will force large institutions to value each asset they hold at a different rate based on what the Basel Committee sees as its level of risk when measuring the stability of their balance sheets,

Deeply liquid, instantly priced and potentially a 'safe haven' asset is good, of course. Unsurprisingly, and very conveniently for debt-laden governments, sovereign bonds fit the bill precisely. Yet physical gold is ranked with the very worst junk an investor can own, and can be accounted at only 15 cents in the Dollar.

That 85% haircut, as you can guess, is a disaster for any bank holding a lot of gold, ready to lend. The cost of doing business will jump – perhaps by 300% on one estimate. And so as the LBMA warned the Basel committee (as well as its own members) back in 2015, "Costs will be transferred to clients, making it very expensive to do business...Market liquidity will fall as a result of firms seeking to reduce their gold holdings."

Put another way, and with real urgency by LBMA co-chairman and Asahi Refining president Grant Angwin today, "Anyone borrowing metal could face serious liquidity issues" thanks to Basel's new net stable funding ratios (NSFR for short).

As in, like, serious. Because a 300% jump in the cost of lending isn't a mere problem. It's a "get out of that business!" problem as CEO Ruth Crowell added.

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Hence the possible but by no means certain "collapse" of our headline. The LBMA executive, together with bullion banks and the mining-backed World Gold Council, have lobbied and continue to lobby the Basel committee, starting a long way back in fact.

But the risk, according to co-chair Angwin, is that the wider gold market – seeing how the LBMA executive and others are working to get new data on gold's deep liquidity so as to educate Basel first about the merits of gold, and then about the dangers of its current decision – will fail to understand or join the lobbying against the "full impact" of the looming 85% haircut when it kicks in, sometime by 2018 on the current schedule.

The Basel committee has, apparently, been "sympathetic" to the issue, but for now, there's no change.

If the banks do exit, then liquidity will be gone...and the gold market will quite literally face collapse.

More fun from the LBMA conference to come!

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About Adrian Ash