Basel III has huge implications for allocated physical gold

Goldex Team

Editorial content

The Basel III requirements are no longer on the horizon. They came into effect on 28th June 2021 for European banks and apply to British banks on 1st January 2022. Whilst the impact they will have on the gold industry is yet to be seen, we anticipate a big shift away from unallocated gold in favour of allocated physical gold. As a result, financial companies will seek providers of allocated gold that can offer both price discovery and significant liquidity.

The aims of Basel III

Basel III was launched in 2009, partly in response to the financial crisis. It aims to ensure banks have sufficient capital, liquidity and less leverage in order to be able to withstand economic shocks.

There are three main parts:

1. Banks must hold increased capital.

2. Banks must maintain a minimum leverage ratio above 3%.

3. They face higher liquidity requirements.

For gold, banks must now hold sufficient capital that exceeds stable funding requirements for one year in a stressed scenario.

Gold is now a “Tier 1” asset

Importantly, Basel III’s reclassification of gold as a “tier 1” asset means it is now defined as zero-risk. Thus, it is considered a cash equivalent. Now central banks can value their physical gold at 100% of its value. However, their gold must be physical and provable.

The physical-gold requirement of Basel III has huge implications for commercial banks, bullion dealers and others that trade in unallocated gold. Now Basel III requires them to put up 85% of the value of the unallocated gold in cash. Before Basel III, it was 0%.

The impact is huge. It means that the entire trading, clearing, financing and settlement infrastructure of unallocated gold becomes exponentially more expensive. Some bullion banks and other institutions may have to potentially close down these parts of their businesses.

The future: ownership, not exposure

It seems clear that the direction of travel is towards the ownership of real gold. Hence, our view is that the potential winding-up of operations in the unallocated markets will necessarily cause liquidity issues. The high cost of operations forces bullion banks out of the market and, as a result, supply drops.

The fear is that liquidity issues may also spill over into the physical markets. If the focus and attention of gold trading shifts towards allocated physical gold, it could result in increased demand that squeezes liquidity and sends gold prices soaring. We cannot forget that physical gold is finite and cannot be printed at will.

The pressure on pricing means that financial companies that wish to offer allocated physical gold will need to do two things:

1. Financial companies must find solutions that enable price discovery.

2. The solutions they seek must also offer multiple sources of significant liquidity.

As a result, smarter allocated-gold trading solutions that offer easy access to multi-liquidity venues and best-price discovery tools might end up being the winners of the changes that are about to hit the gold industry.

Providing price discovery and liquidity

We’re excited to announce the launch of our bespoke trading infrastructure that services other companies and institutions. Thanks to a “plug-and-play” integration, FinTechs and other financial companies can piggy-back on our technology. Once integrated, companies can buy, sell and store gold via the first multi-dealer marketplace that not only solves liquidity issues but also acts as a price-discovery tool.  Goldex’s technology is geared for companies to successfully launch and deploy the new product in a matter of weeks, making it the most cost-effective solution to date.

And the timing could not be better given the upcoming Basel III requirements. Our CEO recently spoke to AltFi on Basel III and the launch of our B2B offering:

“We know the changes and pressures that FinTech companies face in diversifying into new products – let’s not forget that we are a FinTech start-up too.  Of course, Basel III has been on the cards for a very long time and it has not come as a surprise. 

Over the last 18 months we have designed and developed the ultimate solution for B2B and B2B2C companies to be able to compete within their industry and at a time when the gold landscape is changing. 

Being the first to market is always a competitive advantage and we are excited to be in this privileged position.”

– Sylvia Carrasco, CEO of Goldex.

The only marketplace for allocated gold

Find out more about how FinTechs and other financial companies can unlock the world of allocated physical gold for their customers through an easy integration with Goldex on our business page.

 

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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.