Precious metals are increasingly becoming the subject of necessity rather than debate.

Basel III Tightens the Precious Metals Derivative Belt On June 28, the much-anticipated Basel III “macro prudential regulation” to make so-called “safe” banks “safer” officially kicked off in the European Union (July 1 for the U.S. and January of 2022 for the UK). As we explained in June, this would mean short-term volatility for precious metals followed by a steady price climb, which is precisely what followed. This requires no crystal balls nor market-timing manuals, just a candid understanding of gold reserves, the simple math of inflationary forces and an equally simple understanding of market history.

As for Basel III, it was a long-delayed, controversial and internationally agreed-upon banking regulation which, inter alia, requires commercial banks to change their “net stable funding ratio” for physical gold held as a tier 1 asset on their balance sheets from 50% to 85%.

Translated into simple English, banks hitherto accustomed to trading billions in derivative-levered “paper gold” must clean house by treating paper derivatives on their balance sheets as “unallocated liabilities” (i.e., bad stuff) which need to be “matched” by more physical gold “allocated assets” (i.e., good stuff).

After five decades of using levered paper to manipulate a near permanent “short” on precious metal pricing, the bullion banks must henceforth show more physical gold and silver on their books. Basel III ostensibly marked a much-needed change in the over-use of highly levered paper contracts to artificially impact (i.e., impinge) natural gold and silver prices.


Just over a month after Basel III, however, gold saw a flash crash rather than an un-impinged rise, falling by $100 in just 2 trading days. In short, the volatility we anticipated in June came on cue. But how and why could gold fall so precipitously at such rapid speed (before recovering in price just days later)?

The answer boils down to simple math. When 24,000 sell contracts valued at over $4B suddenly hit the overnight (1:00 AM Europe) markets with no bids in sight, the price takes a dramatic dive.

But who would make such a deliberate, levered and frankly unsupported (i.e., guaranteed to lose) bet against gold? And why?


Sadly, the answer is as simple as it is familiar: The very bullion banks that Basel III intended to “clean” were up to their old tricks, deliberately selling gold contracts into a bid-less pool (i.e., black hole) to once again artificially suppress precious metal price direction.

But why? And wasn’t Basel III designed to keep such tricks at bay?  Well, yes and no. 

Basel III’s regulatory push to force commercial banks to hold more reserves of “allocated physical gold” on their books as matching assets against paper gold liabilities had only one glitch, namely: Commercial and central banks didn’t have as much physical gold on their balance sheets as they said they did.

This would explain why the Fed and other commercial banks won’t show their vault audits to the public, as large swaths of the precious metals they otherwise claim to own have been leased, levered and hypothecated out to other players rather than sitting in their vaults. This is fact not fable. In need of more precious metals to meet the Basel III’s regulations, the banks deliberately dumped gold contracts en mass to push the price down so they could re-stock their reserves with gold on sale rather than at a premium. This, of course, amounted to price-fixing 101 and is nothing new to the gold and silver trade in those murky currents of the COMEX or OTC markets.


Despite this open secret (i.e., price fix) in the gold and silver derivative trade, the pundits came out with the standard explanations that gold was falling due to rising rates, a strengthening dollar and strong jobs reports out of the U.S. Unfortunately, none of that is entirely accurate. Even if the much-hyped rate hikes were to transpire in the coming years, this would only be due to the fact that inflation is rising at a much faster pace than rates, which is a tailwind for precious metals.


Critical to understanding gold and silver trends is their relationship to negative real rates. That is, the further inflation adjusted rates go negative (i.e., when one subtracts inflation rates from interest rates), the higher the gold and silver price. Stated even more simply, when inflation rates grossly outpace interest rates, gold and silver shine brightest. Looking ahead, all the hype about potential central bank tapering and rising rates is frankly a clever ruse, for it ignores the far more critical issue of rising inflation, which, again, greatly favours gold in the years ahead.


Despite months and months of central bankers denying inflation or describing the same as “transitory,” the evidence of increasing inflation, which always follows expanding money supply and fiscal spending, is getting harder to deny. Deflationists, of course, will argue that supply-chain related inflation is fading or that COVID related slowdowns will continue to place deflationary pressures on the economy. What they are missing, however, is the fact that inflation is defined by the money supply, not the pundit noise, and of this we are certain: The money supply will only expand further, and with it, so too will inflation and hence the price for gold and silver. Why so certain?


History and math tell us so. Whenever debt to GDP ratios pass the 100% Rubicon, economic growth stalls, and thus so does GDP. At greater than 130% today, US debt to GDP means hard days ahead for Uncle Sam and his real economy, which has nothing to do with the Fed-supported and grossly bloated stock market. With growth, GDP and hence national income slowing, debt-soaked sovereigns have no choice but to survive by issuing more debt paid for with mouse-click created fiat currencies. 

Such monetary policy, combined with trillions more deficit-spending to pay for highly controversial lockdowns means only one thing: Greatly expanded money supply, and hence greater inflation ahead, which means greater currency debasement as well. Despite valiant efforts to deny or downplay inflationary forces, policy makers in debt-soaked nations realistically (and at a whisper) engage in pro-inflationary policies for the simple reason that this helps them inflate-away an otherwise unpayable, unprecedented and unsustainable ($280T) global debt burden.


Equally critical to nations drowning in debt (which they now and conveniently blame on COVID despite fatal debt levels existing long before the first virus headline), is the need to keep the cost of their debt cheap rather than expensive. Interest rates represent the cost of debt, and nations now way over their skis in historically unprecedented levels of debt literally have no choice but to keep those rates artificially low. 

Given that bond yields determine interest rates, the central banks engage in buying their own sovereign bonds in order to keep their yields (which move inversely to price) artificially repressed. In short, low yields = low rates, and low rates = economic survival for sovereigns unable to sustain their debt obligations via economic growth or rising GDP. And where do the trillions of dollars needed to buy those bonds come from? 

That too is as simple as it is tragic: Thin air.

Global central banks (following the Fed’s lead) are literally expanding their money supply at just staggering levels with a mouse click to pay their own IOU’s.

Again, such monetary expansion (excess) is inherently inflationary, which is inherently favourable to precious metals. Thus, as pundits, investors and nervous policy makers fret over rising rates, Fed tapering or dollar strength, they are ignoring the inflationary elephant in the room.


Bond yields, when adjusted for inflation, are negative, which means bonds offer no real return. By the way, a negative sovereign bond is effectively a defaulting bond.

Until the bond market implodes under its own weight, central banks will deliberately pursue further rate repressive policies while simultaneously engaging in inflationary measures to get themselves out of debt with increasingly debased currencies. As stated above, this combination of deliberately rising inflation and repressed rates creates the perfect backdrop for negative real rates and hence gold’s positive rise.

As pro-inflationary forces (expanding money supplies to pay for expanding deficits) gain in windspeed, so too does the debasement of the currencies.

It’s just that tragic as well as simple. This, once again, explains why sophisticated precious metal investors look to physical gold and silver as insurance against dying currencies. Full stop. Given the inflationary math and debt history set forth above, gold is no longer a “debate” but a blunt necessity.   EG