We have received many e-mails and phone calls from readers and subscribers asking “what happened to Basel III”? It is a legitimate question as so many believed it would the moment of truth. I have been on record during many interviews over the past months, stating I had no idea what the immediate reaction would be, if any. I also questioned whether central banks could just “back door” lend (as they did in 2008-09 and then discovered a year or so later) to institutions that needed capital to satisfy the new margin requirements?
I must say, smacking gold and silver coming in to and passing June 28th has come as no surprise. In fact, we have lived through so many of these IN YOUR FACE blatant drive by shootings since at least 1996, that no one should have been surprised. By the way, the June 28th deadline is for European banks, the British banks (and others) who are most heavily exposed on the short side, have until Dec. to comply, so we will see…
Current price action is not important, what is important is the “admission”. For the BIS to require actual margin for unallocated accounts, and then the LBMA scream bloody murder, should clue you to the “naked” nature of this market. What I believe IS important, we are watching the first step to revealing it is not just unallocated accounts that are naked, the ENTIRE derivatives market is naked…but not yet afraid.
We have been on record for many years regarding derivatives, they can never, ever, perform when they are needed most. Meaning, they will not perform or settle at the very moment they are called on to do so. Derivatives by and large are unfunded liabilities that allow hedgers to show “insurance” on their books, even though the hedges are not funded, nor can they ever be. The amount of “protection” via derivatives exceeds any and all capital on the planet! Derivatives look good and feel good…as long as they do not have to perform.
We live in a world of fractional reserve everything. The fractional reserve nature is not important, and no one cares…until it does and they do. Do you care that your bank is not required to carry any reserves for checking account balances? You should, but no one cares because to this point it has not mattered. No one cares and no one will until it is too late to do anything about it. Warren Buffet was called a quack when he labeled derivatives as “weapons of mass financial destruction”. He was correct 20 years ago and still correct today. Derivatives have allowed, for too many years, gross and perverse action in global financial markets. Their moment of non performance will serve as a global advertisement that everything paper is worth nothing and we were hoodwinked into believing that turtles all the down was a strong foundation. Sadly, the true foundation for currencies, debt, and finance will not be widely known until the credit edifice fully collapses. It will not be understood until that moment, the only thing left standing will be free and clear physical gold as a foundation to rebuild upon!