{"id":8561,"date":"2021-05-18T14:41:00","date_gmt":"2021-05-18T13:41:00","guid":{"rendered":"https:\/\/youtrading.com\/en\/?p=8561"},"modified":"2021-05-19T00:56:39","modified_gmt":"2021-05-18T23:56:39","slug":"gold-could-be-unshackled-by-end-of-june","status":"publish","type":"post","link":"https:\/\/youtrading.com\/en\/gold-could-be-unshackled-by-end-of-june\/","title":{"rendered":"Gold could be unshackled by end of June"},"content":{"rendered":"\t\t
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Weekly Commodity Analysis<\/strong><\/p>

Inflation has superseded the global pandemic as the primary risk affecting every corner of the globe. The Federal Reserve insists that the inflationary pressures are transient, not pervasive, though the CPI \/ PCE data shows that CPI has jumped month-on-month at the fastest rate in several years.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Commodity prices have run up to all-time highs as bottlenecks in supply chains create an imbalance to increasing demand on a year-on-year basis, but we have also seen a massive rise in inflationary pressures from the price of energy, particularly through the price of oil<\/a>. But to the frustration of the retail investor the price of gold has failed to go parabolic.<\/p>

The largest economies are looking to spend big on infrastructure, and technologies are pushing towards a global target of net-zero carbon emissions over the next few decades. Gold\u2019s usage within safety-critical technologies and components, fuel cell technology and carbon capture industries are pushing the physical demand at an increased pace with the current industrial\/technology markets equating to approximately 7% of total demand.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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In the long term, gold serves as a strong strategic component in many portfolios, not only for its diversification benefits but also for its returns. As a store of wealth, protection against diminishing US dollar<\/a> purchasing power and as a very liquid Tier 1 asset, pension funds and institutional money managers tend to allocate 5%-10% of the portfolio to the precious metal.<\/p>

Consumer demand driven by the Indian and Chinese markets is a large proponent of gold jewellery, and the Jewellery markets equate to 34% of the total gold demand. As the overall economic outlook and Risk-On markets do well, these consumers purchase more gold. When times are uncertain, as we witnessed in 2020 during the peak of the COVID-19 pandemic, the consumers reduce their purchases of jewellery, but the institutions step into the market to de-risk their portfolio, as Gold is a safe haven portfolio hedge, which decreases the price volatility during the uncertain times.<\/p>

The New Regulatory Framework<\/strong><\/p>

Gold is a High-Quality Liquid Assets and as of 2019, the Bank of International Settlements (BIS) reclassified physical gold as a Tier 1 asset. Gold was previously viewed as a risky asset, classified as a Tier 3 asset, which meant that gold could only be carried on banks\u2019 balance sheet at 50% of the market value for reserve purposes. Since the Great Financial Crash, a lot has been done within the banking system to try and protect the broader economy from banks blowing up, as Lehman Brothers did.<\/p>

As part of the regulatory framework, banks have been working under Basel 111 rules and the time is coming for some of the rules to be enforced on the gold markets.<\/p>

These new regulations are scheduled to be introduced for European banks at the end of June 2021 and in the UK from 1 January 2022, affecting all London Bullion Market Association (LBMA) member banks. The risks to the bullion banks are that they trade in an OTC derivatives market, not holding much, if any, allocated gold. Allocated gold is when an investor is allocated gold and is the outright owner of a certain amount of physical bullion.<\/p>

There will be a requirement for banks holdings to meet a ratio limit between tangible assets and unallocated assets. The ratio is named Required Stable Funding and the crux of the matter is that if the bullion banks can no longer trade their paper and unallocated gold without holding physical allocated assets, the derivatives market could collapse. The 3 parts of the Basel 111 regulations that affect the paper gold markets are:<\/p>