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LAWRIE WILLIAMS: Gold and Basel III - initial price weakness results?

 Well, Basel III came into effect yesterday for European banks and, contrary to some expectations gold and silver prices didn’t take off.  Indeed heading into this morning’s European trade the reverse has been true, with the gold price falling back into the $1,750s in volatile trading.

As Ed Steer puts it in his latest daily Gold NewsletterBasel III is in effect -- and so far I've noticed zero changes. If they're coming, it's obviously not going to happen overnight -- and I'm ever so happy that I didn't put a stake in the ground on this right from the outset.  But it's still very early in this Basel III game -- and I'm still in the 'wait and see what happens' mode until further notice, or until there are some obvious changes worth commenting on.”

We too are pleased that we didn’t anticipate any major upwards move in precious metals prices, although we do have to say we weren’t expecting the kind of negative reaction seen so far.  In an article published at the weekend, ahead of the new accord taking effect (see:  Gold and silver: Basel III price impact) we noted “We, ourselves, are somewhat undecided on the likely price impact on precious metals but recognise the assumed implementation on June 28th might well contribute to a degree of gold price volatility as the markets try and assess the likely fall-out.  This volatility will likely continue until markets settle down.” So far this volatility seems to have expressed itself in weaker prices – perhaps unexpectedly so.  Maybe it’s due to disappointment within the gold investment sector that the hugely positive reaction, predicted by some analysts, just didn’t arise.

As Ed Steer noted above, it’s early days yet for the Basel III implementation to have any real effect on the markets, and there are some positive signs already developing in terms of what appears the be positive Central Bank gold interest from countries which had hitherto mostly been inactive in the sector.  The latest of such is Thailand which apparently added a massive 90 tonnes to its gold reserves over April and May – following behind Hungary which tripled its own gold reserves by adding 63 tonnes of gold in March.  These gold reserve additions could prove to be the tip of the iceberg as far as global Central Bank gold activity is concerned.

The World Gold Council notes that one of the principal reasons behind central bank gold purchases is in anticipation of changes in the international monetary system.  Basel III could well be a trigger – particularly given its effective revaluation of physical allocated gold as a Tier 1 banking asset.  The recent timings of the Hungarian and Thai gold purchases may well prove to be significant in this respect.  It will be interesting to see if any other Central Banks follow a similar path, although this is an extremely secretive sector, so any such changes may be difficult to follow.

But what of the gold reserves of the two most recent major gold reserve builders  – Russia and China?  Russia’s reclassification enabling its sovereign wealth fund to hold gold could be significant given that the fund falls under the administration of the nation’s central bank and contributes to its reserves.  According to Russian-focused website , until now, the National Wealth Fund has been allowed to allocate funds to all main financial asset classes, but not gold. Now the latest amendment adds gold and precious metals to the list which could provide a back door in gold holdings into Russian reserves.

China, which has reported buying no gold since the second half of 2019. Is widely believed to hold more gold than the 1,948 tonnes it reports to the IMF – perhaps considerably more.  As the world’s largest gold producer it is impossible to assess whether it is adding to these reserves on an annual basis.


29 Jun 2021 | Categories: Gold, Silver, China, UK

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