Global banking regulations are in the news, with the UK and the European Union recently announcing that they would delay the rollout of changes to the Basel III regulations until at least 2023.
The Basel III accord is the third in a series of recommendations for regulations in the banking sector across the globe, designed to mitigate risk within the sector by requiring banks to maintain leverage ratios and keep reserve capital on hand.
The changes, which are designed to strengthen the regulations agreed to in the first (1988) and second (2004) Basel accords, are tipped to have an impact on the price of gold, as they will require financial institutions to own allocated, tangible, physical gold assets, rather than derivatives.
What’s happening with Basel III
Basel III was developed in response to the global financial crisis of 2007-08, with the aim of making banks more resilient, and it was signed off on way back in 2010.
It was planned to be introduced between 2013 and 2015 but has been continuously delayed.
In response to COVID-19 being declared a pandemic in March last year, the body that oversees the regulations, the Group of Central Bank Governors and Heads of Supervision (GHOS), deferred the rollout of Basel III until the start of 2023.
In late October, the European Union went a step further, with the European Commission pushing its implementation out to 2025. Earlier this month, the UK made the call to implement the Basel III standards “post-March 2023”.
It is a blow for the Basel committee, which has been calling for the standards to be implemented as soon as possible, but both the UK and the EU say their new timelines are more realistic given the challenges of COVID-19.
What does all of this have to do with gold?
Davide Bosio, director of corporate finance at Shaw and Partners, tells Proactive that the regulations, when they are finally implemented, will lead to changes for financial institutions and investment banks.
“The changes require a financial institution to have exposure to or ownership of the underlying physical instrument being actual physical gold,” he explains.
“Which means if you are holding options or derivatives of gold, it becomes a lot harder to use that in your asset calculations.
“If you’re looking to use gold as a real asset from a balance sheet perspective, then you can’t just hold derivatives.”
The impact on the gold price
The gold price is one of the most talked-about subjects in all of finance.
In 2021, the price has fluctuated, dipping below US$1,700 an ounce on two occasions in March, but also exceeding the US$1,900/ounce barrier in January, late May and early June.
In contrast to the vast majority of finance markets, however, gold has been incredibly resilient in the face of the pandemic, not once dropping below pre-COVID levels.
“Gold has still been quite a good and safe performer, and we think there is plenty of strength in gold to come,” Bosio says.
Bosio says many gold commentators are still waiting for a gold rally, in the hopes it could exceed the US$2,000/ounce mark - only once in history has gold traded at or above that mark, in August last year.
“This is why some commentators are looking at the Basel III changes as having a significant long-term impact,” he says.
“One could assume that, over the longer term, that may mean that some of the larger institutions need to have direct ownership of physical gold, which could create more demand and lead to higher prices.
“Investors really need to be discerning as to what they’re buying when they’re investing in gold; if it is an ETF or a fund, it would need physical gold behind the actual security, because otherwise, Basel III may mean fund managers or ETF providers would have to change the way they do business.”
- Daniel Paproth