With the introduction of Basel 3, commercial banking enters a new era of diminishing involvement in derivatives. The nominal value of all derivatives at the end of last year amounted to seven times world GDP. While we can obsess about the effects on precious metals markets, they are just a very small part of the big Basel 3 picture.

However, gold remains central to global money and credit and the impact on gold markets should concern us all. In this article I quantify gold forwards and futures derivatives to estimate the impact of reversing anti-gold policies that date back to the Nixon shock in 1971.

We are considering nothing less than the effects of ending fifty years of gold price suppression. Through leases, swaps, and loans central banks have fed physical bullion into derivative markets from time to time to keep prices from rising and breaking the banks who are always short of synthetic gold to their customers.

To summarise, bullion banks withdrawing from derivative markets is bound to create replacement demand for physical gold that can only drive up the price and further undermine fragile confidence in fiat currencies at a time of rapidly increasing monetary inflation.