Live Metal Prices / oz
Gold: 1811.42 USD
Silver: 25.41 USD
Platinum: 1011.50 USD
Palladium: 2647.00 USD
Rhodium: 20900.08 USD

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Will Basel 3 Boost Gold Prices?

The Basel 3 agreement is a plan encompassing international financial reforms created by the Basel Committee on Banking Supervision. These upcoming improvements in bank system operations will enhance regulation, oversight, and risk management throughout the banking sector.

The objective of the upcoming Basel 3 laws is to restrict the amounts of risk that banks take on in the quest for profits, thereby preventing a global financial catastrophe. In principle, it's a fantastic concept. In actuality, however, some changes may be so disruptive to the operations of some states, financial institutions, and banks that there is already backlash. With allocated gold bullion, an individual owns coins or bars that have been uniquely recognized and separated. A bank will then only serve as a storage facility.

The Basel 3 laws governing bank trade in gold bullion may disrupt the bullion market. When trading bullion, it is classified as either an allocated or unallocated asset. With allocated gold bullion, an individual owns coins or bars that have been explicitly recognized and separated. This means that gold or precious metals are stored at a 1:1 ratio, and are not leveraged.

However, when comparing a bank's liabilities to a client's assets on account, banks only keep a tiny fraction of their assets in the form of physical coins and money. This also applies to precious metals. This lack of a requirement to hold bullion in custody on a 1:1 ratio has caused a significant difference in the amount of precious metals physically stored in bank vaults as compared to client obligations on paper. In other words, the banks are leveraging the physical bullion that they are storing, and allocating the same physical bullion bar to multiple clients. 

Banks use unallocated storage for client bullion. A financial institution may have many bullion bars in unallocated storage, any one of which may be delivered or withdrawn on behalf of the client. Alternatively, each client is an unallocated creditor of the bank with a claim against part of the bank's assets. Because bullion represents a relatively tiny fraction of a bank’s total assets, the bank must meet its obligations even though it may not have legal possession of all of the gold bullion owed to clients.

The effect that forced allocation would have on precious metals would likely be a price increase. The influence of these upcoming changes in the market is so significant that a document produced by the Prudential Regulation Authority, the United Kingdom's bank and financial sector regulator, was submitted by the London Bullion Market Association as well as the World Gold Council requesting that the changes in Basel 3 standards in trading unallocated precious metals be eliminated. According to the report, implementing the proposed laws would weaken banks' capacity to clear and settle gold bullion trading, decrease volatility from the marketplace, significantly increase the financing costs of such deals, and ultimately limiting the Central Banks' operations with the bullion pricing. These next round of Basel 3 changes are due to be implemented in June, 2021.