Posted 18th December 2020

How will Basel III rules impact the gold price?

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Andrew Maguire looks ahead to the introduction of Basel III rules in March 2021 and breaks down the expected global impact on banks, the gold markets and the price of gold itself.

Watch this week’s Live from the Vault for:

  • New year targets for gold and silver.
  • The price liquidity providers and trading houses see silver hitting early in the New Year.
  • Insight into gold over the holiday season.
  • Physical delivery demand for COMEX gold continues to escalate.
  • Details on the cash settlements banks are taking for November contracts.

Table of Content

What is Basel III? And what will change?
When does Basel III take effect?
What are the implications of Basel III?
Is Basel III mandatory?
What does Basel III mean for banks’ gold reserves?
What does this mean for the gold?

What is Basel III? And what will change?

Basel III (pronounced Bah-zel) is a set of international regulatory rules introduced to improve the regulation, supervision, and risk management of banks. Currently, banks are able to classify gold as a Tier III asset, the riskiest asset class. However, following the implementation of Basel III rules, gold allocation must be moved to a Tier I asset.

When does Basel III take effect?

According to the FSB, the Basel III reforms are in the early stages and will take full effect from January 2023.

What are the implications of Basel III?

Andrew Maguire reports that Basel III rules coming into effect in March 2011 through to January 2021 will eliminate the 50% evaluation haircut on physical gold reserves. For those of you unfamiliar, a ‘haircut’ is the difference between the current market value of an asset and the value given to that asset for purposes of calculating regulatory capital or loan collateral.

The precious metals expert explains the absence of a haircut is extremely important if unallocated gold continues to be utilised as a funding source for gold leases at current levels. For example, the Bank of International Settlements (BIS) has shown record leasing flows, all consisting of unallocated gold. Andrew Maguire predicts that the onerous financial conditions of Basel III would lead to massive leasing costs.

Given the fragility of the paper to physical gold condition, with physical delivery demand for COMEX gold continuing to escalate, Andrew Maguire reports that Basel III rules are proving a source of great concern for the LBMA.

Watch Andrew Maguire explore the unprecedented physical bullion delivery requests for COMEX Gold in last week’s ‘Live from the Vault’.

Is Basel III mandatory?

Yes, it does. The European Banking Authority announced in March 2021 that from December the Basel III monitoring exercise will become mandatory.
Internationally active banks-members are committed to implementing and applying Basel III standards within the time frame established by the Basel Committee.
This will happen in order to have a better sample size from more banking and credit institutions.

What does Basel III mean for banks’ gold reserves?

Currently, paper gold is not a 1st tier asset. Only fully allocated physical bullion that has no counterparty risk attached that qualifies as a first-tier asset. As we mentioned earlier, Basel III rules coming into effect in March through to January 22 will eliminate any valuation haircut.

The new rules will require a provable 1:1 ratio of fully allocated gold reserves, with no counterparty risk. Under Basel III rules, every central bank will be able to revalue its physical reserves higher, from a current 50% haircut into a fully cash exchangeable asset.

Andrew Maguire believes that central banks will be able to pay off massive swathes of debt by revaluing gold. According to the precious metals expert, gold would not only act as a cash asset, but would also behove central banks to revalue the dollar price of gold.

What does this mean for the gold?

Andrew Maguire believes Basel III rules will lead to a sanctioned gold reevaluation, while ultimately driving a more physical market. In this week’s episode of Live from the Vault Andrew Maguire looks at how Basel III rules will affect the price of gold and reveals the level at which he estimates the precious metal will be revalued.

Andrew Maguire’s parting thought:

Basel III rules are going to be bullish for gold.

Next Episode: Andrew Maguire carries out another detailed round-up of the gold and silver markets.

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The opinions expressed in this publication are those of Andrew Maguire and do not purport to reflect the official policy or position of Kinesis.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.