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Basel III and Gold Resource Center What is Basel III? Born out of the global financial crisis, Basel III is an international regulatory accord intended to mitigate risk within the banking system and make banks more resilient to financial stress, thereby preventing system-wide failure. Key requirements cover leverage ratios and reserve capital (Source: Investopedia). The stated purpose of Basel III regulation is to prevent the repeat of another global financial crisis event. Originally written in 2009, over 28 central banks participated in drafting the regulation. It has been repeatedly delayed and is now set to go into effect on January 1, 2022. What does Basel III have to do with Gold? The answer to this question requires an understanding of a bank’s balance sheet. Without this fundamental understanding, the regulatory framework of Basel III will be misconstrued (for example when someone says that gold is a “tier 1 asset,” or says that banks can own “allocated gold” without penalty). Basel III and the Bank Balance Sheet 101Basel III Regulation attempts to ensure banks remain solvent during difficult times. For a bank to remain solvent, its assets must cover its liabilities like any other business. However, banking is not like any other business, it’s a very particular kind of business. A bank borrows to fund a portfolio of assets, typically loans. In a bank, its capital is the liability side of its balance sheet. This is what it borrows from depositors and other entities (though it may sell equity too). The loans it makes with that capital are its assets. For the bank’s assets to cover its liabilities, the value of its loan portfolio must exceed the value of its capital. Where does Gold fit into Basel III? To understand how gold fits into all this, the following selection from Keith’s article spells it out:
Gold Under Basel III
Thus, the net effect of the Basel III regulations on gold is that it now costs more for banks to own gold. Basel III Impact on Gold and the Gold Price Gold investors are right to wonder what effect, if any, will Basel III have on the gold price? Our take is that it’s not immediately clear if Basel III will drive the gold price one way or the other. What is clear, is that Basel III introduces new regulatory costs and burdens to participating in the gold trade. In other words, it increases friction in the gold market. Regardless of whether the price is rising or falling, nobody likes increased friction in a market. If we were to make a call, it would be for greater volatility in gold going forward. For further analysis on the impact of Basel III on gold, we highly recommend Keith’s latest video: Basel III: Causing Gold’s Volatility? Videos on Basel III and Gold Here are two videos of Monetary Metals CEO, Keith Weiner discussing Basel III and gold. The first was published in June 2019 and has over 60k views. The second was published last month and has over 30k views. June 2019 – Basel III, Not Good for GoldFor a transcript of this video, please click here: Basel III, Not Good for Gold June 2021 – Basel III: Causing Gold’s Volatility? For a short summary of this video, please click here: Roundtable on Basel III and Gold
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