“Gold, Mr. Bond!”

Goldfinger’ 2021 plot twist could be villainous for banks

Gert Fröbe as Goldfinger in the eponymous 1964 James Bond film. He hoped to lift the value of his gold supplies by setting off an atomic bomb at Fort Knox

In the plot to the 1964 James Bond classic, international gold smuggler Auric Goldfinger hatches a dastardly plan to enrich himself and his outsized gold holdings by setting off a Chinese-made atomic bomb at Fort Knox, the home of the US gold reserve.

Goldfinger’s rationale is that the nuclear fallout will render the US bullion unusable for many decades, impeding its mobility through the international financial system, and in so doing lift the value of his own unaffected supplies, thus making him the richest man in the world.

It’s a crazy plan by anyone’s standards. And yet, the bifurcation at its heart may have more relevance to 2021 than many appreciate.

Why? Under the new Basel III banking framework, which came into force for all bullion centres other than London in June, not all gold assets will be considered equal.

In compliance with the net stable funding ratio (NSFR) rule, bullion held by banks in unallocated form will fail to qualify as a zero-risk asset. This means only gold that can be demonstrably allocated to specific entities will be considered safe enough to qualify for net stable funding purposes (ie as good as cash), making this far more attractive to hold on bank balance sheets than the unallocated sort.

To say the rule is a monumental reversal for the industry is probably an understatement. Ever since Richard Nixon broke the US dollar off its gold peg 50 years, banks have benefited from being able to pool and reuse gold in a fungible way among customers. The fact that they may not be able to do this cost effectively represents a rare de-financialisation of sorts.

In theory, the rule poses a risk to the value of gold held in paper form only. Or so, at least, say the retail-focused gold bullion dealers who have long circulated rumours that the gold system is hugely under backed by true holdings of the yellow metal.

Yet, despite predictions of certain doom for those who dared to hold their bullion in pooled investment vehicles, there’s been a curious lack of fallout thus far.

Apart from a moderate flash crash on August 9, which saw the price of gold fall 4 per cent to $1,680 per troy ounce and recover swiftly thereafter, the market has been showing remarkable resilience to any switch in holding preferences by key bullion-dealing banks.

Could that imply fears about the toxicity of gold derivatives issued by financial institutions have been hugely overhyped by gold promoters who, like Goldfinger, are more interested in inflating their own positions than improving system stability?

Definitely — but it could also be too early to tell. The NSFR doesn’t come into force in London, probably the most important bullion-dealing centre of all, until January 2022.

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Others have argued the impact won’t be known until the higher costs of dealing with unallocated gold are passed through to the gold manufacturing and processing industry — or the clearing and settlement systems that still depend on gold.

That might have less of a bearing on mature financial systems that operate almost exclusively in central bank digital transfers, but it could have a sizeable impact on less sophisticated systems that depend on liquidity accessed through gold collateral.

For example, when the Taliban lost control of Afghanistan in 2001 they raided the central bank coffers, removing all the gold and cash reserves. In this scenario, the gold’s allocated status made little difference to its security.

This time round, as the Taliban reseize power of the national central bank, they won’t be inheriting any physical reserves at all, says Ajmal Ahmady, the former governor of Da Afghanistan Bank. The vast majority of the state’s cash and gold is held in custodial accounts in the New York Fed and can only be accessed via legally recognised title.

The set-up qualifies as an unallocated framework (since the gold is on loan to New York) but it’s hardly a weakness in this scenario.

“Gold, Mr. Bond.”

Having one’s gold reserves suddenly rendered illiquid is a scary thought for those countries that still depend on them. There are only four gold clearing banks. Between them they service many of the world’s central banks, offering important liquidity services in exchange for gold collateral or gold loans. When they do so, as the London Bullion Market Association warned in 2020, this is largely on an unallocated basis.

The LBMA fears if it becomes too costly to offer such deals, this could prompt any one of these institutions to exit the business entirely, which could undermine market liquidity and even collapse the gold clearing system.

It’s a good job, then, that Basel’s “Operation Grand Slam” may have been nipped in the bud by the British at the final moment. The Bank of England’s Prudential Regulation Authority determined in July that banks clearing trades through London could apply for an exemption. And, bizarrely, despite the regulatory arbitrage coup this would be for the London market, there’s been precious little international blowback just yet.

Written by Izabella Kaminska for The Financial Times ~ August 20, 2021

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Please allow me to introduce myself; I am Jeffrey Bennett, President of Kettle Moraine, Ltd., the parent of Sierra Madre Precious Metals. I have been married for 52 years with two children and four grand-children, a veteran of Viet Nam, student of history (both American and film), and was host for fifteen years of Perspectives on America on the alternative airwaves, covering such subjects as, health and wellness, news, political satire, education and editorial commentary on current events through the teaching of history, and Protecting Your Wealth. In early 2018, I took a several month hiatus to complete some family business but returned to airwaves April 17, 2018). At the age of ten, I sat in a bank-vault in the Citizens Bank of Mukwanago, Wisconsin with my grandfather going through bags of old American Peace dollars, hand-selecting each coin as dated rolls of 20 coins were carefully put together and rolled. Learning of the history of these beautiful pieces of Americana, I asked my grand-father, "Why are we doing this?" to which he replied, "Because someday they are going to do the same thing with the silver in our money that, that (S.O.B.) Roosevelt did with gold in 1933." It took only six-years for his prediction to come to pass at the hands of a disciple of Roosevelt's... and what will a Federal Reserve 'dollar' purchase today - and what will that old 90% Silver Peace Dollar purchase? Although at the age of ten, there was little understanding of the meaning of it all, over the next half-century I became well-versed on the subject matter. During this summer of my education, I began to purchase silver coins as a collector and some small, international gold coins two years later - not an easy feat in the shadow of the Roosevelt confiscatory policies of 1933. Although those policies remained in effect until the mid-1970's, it was not until 1991 that I found that one could make a living providing precious metals and collectible, historic numismatic coins to a willing and concerned clientele. It was also during that year, that I began a relationship with one of the first Trust companies to give the public access to gold and silver as part of an Individual Retirement Account (IRA) - and Kettle Moraine, Ltd., founded in 1995, but have ceased providing service due the the intense change-over of the provider. In November 2011, after a 15 month broadcast on another network, I returned to the airwaves with my then revamped program, Life, Liberty & All That Jazz, and for over a quarter-century, I have been proud to serve the family of listeners of my numerous broadcast programs for physically-held precious metals for investors and collectors alike. On March 23, 2020 I launched my brand new - appropriately named program, The Edge of Darkness on the Republic Broadcasting Network, and thus continue to  remain available to our long time clients and their families. Ah yes - find out what "inter-generational" wealth provision has done for our clients over the past three decades. Don't buy the sizzle of that steak until you understand the cost! In other words, don't buy the bull being dispensed by the 'rare coin' pitchmen until you understand the full story. We, at Sierra Madre Precious Metals, will be proud to serve your needs.
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