An important event happening on Monday that I have been following for awhile - the implementation of the Basel III rules where Gold changes from a tier III asset to a tier I. This ends the rehypothecation of gold, which is needed to manipulate prices on the paper market. It's going to be interesting to follow up with these events on Monday and at the comex; there could be some clearing houses that go bust as soon as the rules go live as they weren't able to cover their position in time (which they had 7 years to do).
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Could you please explain it to me like I'm 5?
^same. Is this good for gold?
I'll try my best. Rehypothecation of gold is where banks and brokers use, for their own purposes, the gold that have been posted as collateral by their clients. So a customer has one ounce ounce of gold, the banks would turn that one oz of physical gold into 100oz of paper gold and that the banks can use on the market to restrict the price. So each physical ounce of gold in the bank has a 100 claims to it.
The big problem in 2008 with the whole Lehman Brothers, Bear Stearns debacle, the banks were being pressured to limit the risks with such schemes, so the BIS (which is basically the Fed's boss - the central banks of all central banks) created these rules that said if you are selling paper gold, you need to have a higher amount of physical gold to back that up.
I think this would be good for gold since all those levers that were previously suppressing the price, are being taken away with these rules. The price discovery mechanisms for gold, which previously was using this paper scheme to determine the price, would more reflect that true demand for physical metal that is actually available, which is probably going to be scarcer with impending inflation.
Thank you for the explanation. Makes complete sense. My neighbor was telling me something about this a little bit ago but he kind of jumps around on topics so I didn't grasp what he was saying about gold. He told me to continue to stock up on physical metals.