New Banking Rules May Be Bullish for Physical Gold

New international regulations designed to stabilize the global banking system boost the status of gold and are likely to be bullish for the precious metal. The rules are taking effect across Europe as of June 28 and will be implemented in Great Britain as of January 1, 2022.

The so-called Basel III rules call for physical gold that is allocated to a specific owner to be considered a “Tier 1” risk-free asset for banks and therefore counted as part of commercial bank reserves, just like cash, which are essential for a bank’s financial stability. It’s a clear incentive for banks to hold gold in their vaults.

The new status does not apply to so-called “paper gold”—agreements to own gold that includes future contracts and gold-backed exchange-traded funds (ETF). These agreements are classified as “unallocated” gold because there are no specific gold bars associated with any of the futures or ETFs. The Basel III rules are designed to ensure banks can pay out whatever their clients want. Since banks don’t physically hold most of the “unallocated” gold, the new rules will now require banks to hold 85 percent funding (in cash or physical gold) as collateral against the financing of such “paper gold” transactions. In other words, international banking regulators agree there is nothing like holding genuine gold— it is far more secure than an electronic document that states one is entitled to own gold.

The Basel Committee on Banking Supervision, a 45-member group of bank supervisors and central banks, drafted the Basel III accord in the aftermath of the 2008-2009 financial crisis. Like the earlier Basel I and Basel II agreements, Basel III was settled upon as the basis for national or regional rulemaking and the rules regarding gold in Europe are only going into effect now.