Gold testing support with focus on dollar and Basel III

Basel III: International regulatory framework for banks.

Much attention has been given to new banking rules, part of an international accord known as Basel III, that came into effect yesterday across Europe and by yearend also in the UK. An event that by many has been labelled as a new dawn for gold leading to a major liquidity squeeze that could send the price sharply higher. Whether or not that will be the eventual outcome, there is no doubt the rules will shake up the industry, especially when it comes to how unallocated, or so-called “paper” gold is being treated from a risk perspective.

While classifying gold in physical form as a zero-risk asset in line with cash and currencies, unallocated gold or “paper” gold which banks typically deal with the most will not. The new Net Stable Funding Ratio (NSFR) requirement specifies that an 85% Required Stable Funding (RSF) needs to be held by banks against the financing and clearing of precious metals transactions in unallocated gold. Previously it was zero and as a result it will increase the cost of holding unallocated gold and it will most likely lead to lower activity while making physical gold more attractive and less exposed to hedging or selling activities.

In addition and given its risk-free status, some are speculating that demand for allocated or physical gold could see more demand from banks as a store of value. While the dollar and yield developments remain the key drivers for gold, over time and especially when the UK, one of the world’s largest trading centers for gold, joins towards the end of the year, Basel III may end up having a net positive impact on the price action.

Silver (XAGUSD) - Just like gold, silver also managed to find support after correcting 61.8% of the March to May rally which at $25.67 also co-insides with the 200-day SMA. Additional weakness below could see it target the 76.4% retracement at $24.95. The upside is currently capped at $26.26 with a break above potentially seeing it target the 50-day SMA around $27. RSI is in bearish sentiment with no divergence meaning the short-term risk is to the downside.