Basel III and the price of gold: what you need to know
Most Americans don’t think about banking regulations, and for good reason. The amount of paperwork surrounding the banking and financial industry is enormous. Imagine the level of compliance that banks must meet to stay in business.
In the US Code, Title 12 deals with banking and banking, and Title 31 deals with money and finance. The Code of Federal Regulations has corresponding titles dealing with the same subjects. Second, each state has its own banking regulations, and many localities also have banking regulations.
Then you need to think about the various federal regulators, such as the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Consumer Financial Protection Bureau, which each issue their own regulations. Finally, you have international organizations such as the Bank for International Settlements (BIS) which coordinate supranational banking regulations. Is it any wonder that banking seems so complex these days?
But if Americans don’t really pay attention to banking regulations, it still affects them. And these regulations often have a ripple effect in investment markets as well.
Among the regulations that have recently been the subject of press is Basel III. You may have heard of it before, or you may not. Basel III is a set of voluntary international financial standards agreed by the BIS in the aftermath of the 2008 financial crisis. It aimed to fill gaps in bank capital standards so that banks are better able to weather another financial crisis. systemic.
While Basel III was approved over ten years ago, its implementation continues to be delayed. Right now, it is expected to come into effect in early 2023, which is roughly a year and a half. And some analysts believe that the implementation of Basel III could lead to major changes in the gold markets.
Getting to the bottom of risk weighting
If you don’t want to read the over 1,600 full pages of the Basel III framework, you’re not alone. The document is a real mess to wade through, and without an understanding of the existing Basel framework it can be easy to get lost in the details.
One of the main takeaways, however, is found in a footnote on the risk weighting of various assets. Risk weighting is a way to determine how risky certain assets are. And depending on the degree of risk of the assets held by a bank, the bank may need the amount of regulatory capital it holds.
For Basel III purposes, a 0% risk weight means something that is absolutely risk-free, like cash. And in general, the highest risk weight is 150%, for things like junk bonds or sovereign bonds that are in default. The riskier the assets held by a bank, the more capital it must hold in reserve. The incentive is therefore to hold less risky assets such as cash or sovereign bonds rated AA and above with a risk weight of 0%.
According to Basel III, “at national discretion, gold bars held in their own vaults or on an allocated basis to the extent that they are backed by ingot liabilities may be treated as cash and therefore risk weighted. at 0% “. This means that gold not held in its own vaults, or unallocated gold, falls under the standard risk weight for other assets, which is 100%.
According to some analysts, this could lead to major changes in gold holding by financial institutions. While they can now hold unallocated gold or “paper gold” as an asset on their balance sheet, these will now become riskier assets under Basel III. And physical gold could now be treated as as safe as cash.
The incentive, therefore, assuming Basel III is fully implemented, is that banks will be incentivized to hold physical gold in their own vaults, rather than buying “paper gold” such as unallocated gold in third party custodians. And if that happens, it could have major ramifications for global gold markets.
The demand for paper gold could fall, while the demand for physical gold and the delivery of this gold could increase. This could provide a significant boost to the price of gold, which some now believe is unfairly suppressed by the popularity of paper gold assets.
The future is golden
Of course, this all hinges on the implementation of Basel III. And as far as we know, we could face another financial crisis before Basel III goes into effect. Of course, that in itself would likely lead to an increase in demand for gold, so gold investors might do well either way. But it seems that more and more players in the global financial system are realizing both the importance of gold in the banking sector as well as the need to integrate it into banking regulation.
As gold continues to gain in importance and relevance in the financial system, demand and price could increase. We could very well see ourselves on the eve of a revolution in the monetary system in which gold will resume its traditional role not only as a stable asset, but also as a monetary instrument. Are you ready to take advantage of it?
The stability of gold and maintaining purchasing power have helped investors defend and protect their wealth over the centuries through economic turmoil and financial crises. It continues to play this role today and is growing in popularity as the US economy remains weak.
If you have retirement savings and investments that you want to protect, it might be time to start looking at gold before the price of gold really skyrockets. Call the experts at Goldco today to find out how you can take advantage of gold to protect your savings.
Trevor Gerszt is America’s Gold IRA Expert, CEO of Goldco Precious Metals and sits on the Los Angeles Board of Directors of the Better Business Bureau.
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