Basel III is Coming, and That’s Bullish for Gold, by Adrian Day

The theory is that by drastically curtailing “paper” gold markets, Basel III will increase demand for physical gold, and thus its price. From Adrian Day at

Basel III for gold

The new Net Stable Funding Requirement (NSFR) rules under Basel III for gold come into force at the end of this month. They are barely mentioned in the mainstream financial media, yet they will have a major impact on gold, gold dealers, and banks, although much of the speculation on the motives for and the impact of the rules on the gold price is exaggerated, in my opinion.

What the rules require

The NSFR rules essentially state that assets must match liabilities: Available Stable Funding (ASF) divided by Required Stable Funding (RSF) must equal one or more. ASF relates to the bank’s funding on the liability side and includes bank equity, long-term funding, and customer deposits. RSF relates to the bank’s assets. However, the rules provide certain discounts for different types of assets and exclude some altogether. There are two related issues concerning gold: allocated versus unallocated bullion and paper contracts versus physical bullion.

Under the old rules, paper contracts and physical gold were valued identically at only 50% for reserve purposes. Basel III, however, moves gold from a Tier 3 asset to Tier 1, meaning that physical gold can be counted at 100% of value in calculating reserves. Unallocated physical bullion owed to customers, as well as paper contracts, have zero value for this purpose. This means that such unallocated bullion and paper contracts cannot be used as a source of bank funding. (Allocated gold, gold owned by specific customers held in custody, is not on the bank balance sheet.) Theoretically, this could cause banks to buy vast amounts of physical gold.

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