Eric Sepanek
SBC Founder
Eric Sepanek is the founder of Scottsdale Bullion & Coin, established in 2011. With extensive experience in the precious metals industry, he is dedicated to educating Americans on the wealth preservation power of gold and silver.
As gold smashes through all-time highs, some analysts are content to chalk it up to central bank buying, geopolitical stress, and a shaky global economy. While those factors are key drivers of the unprecedented surge, this surface-level analysis risks overlooking a quieter but more foundational shift: gold’s reintegration into the global financial system.
Basel III, a global banking framework, recently adopted funding and liquidity requirements that disincentivize banks to hold paper gold and speculative securities. This financial pressure subtly encourages financial institutions to utilize physical bullion, increasing gold’s role in the world economy.
What is Basel III?
Basel III is an international framework designed to improve the resilience, oversight, and risk management of the global banking system. This third installment of the broader Basel Accords was launched in the wake of the 2008 financial crisis in an effort to prevent a similar banking collapse in the future.
Generally, Basel III requires banks to:
- Hold more secure capital to withstand losses better.
- Maintain larger liquidity buffers for short- and long-term stability.
- Limit excessive borrowing and risk-taking at the expense of depositors’ finances.
Although the Basel Accords have no legal authority, the framework has been adopted by a majority of nations across the globe, making these gold-positive changes highly impactful.
Gold Gets a Regulatory Facelift
Some headlines have claimed that Basel III gave physical gold a long-overdue upgrade. The truth is more nuanced, but still bullish. Allocated gold—physical gold held in a vault and assigned to a specific owner—has long been treated as a top-tier, low-risk asset by regulators. What’s changed is how gold fits into the broader banking system.
Basel III raises the cost and complexity of holding unallocated gold, such as futures, exchange-traded funds, and mining stocks. These paper derivatives carry more risk and require more capital than allocated physical bullion.
As those paper instruments become less attractive, banks and institutions are increasingly turning to physical gold as a safer, more efficient option. Although gold’s classification hasn’t changed, its role in the system is being strengthened, not redefined.
Why Basel III Favors Real Gold Over Paper
Here are the most impactful Basel III changes pushing banks toward physical gold over paper gold:
NSFR’s 85% Funding Rule
Under the most recent rulebook, banks must fund unallocated gold positions with 85% stable capital. This Net Stable Funding Ratio (NSFR) effectively makes holding paper derivatives more expensive, pushing financial institutions toward allocated gold due to its lower funding burden.
End of Tier 3 Capital
Basel III axed the entire classification of Tier 3 capital, eliminating a crucial support structure for trading speculative gold positions. This restriction minimizes risk exposure often associated with leveraging paper gold, while increasing institutional appetite for more stable, lower-risk physical bullion.
Tighter Collateral Standards
Banks face more limitations when selecting assets to use as collateral. The updated regulations prefer assets with lower risk and higher liquidity to reduce exposure. Physical gold held in secure vaults without counterparty risk fits the bill, and paper forms are discouraged from being used as leverage.
UK Clearing Exemption
The United Kingdom’s Prudential Regulation Authority exempts clearing banks that deal with physical precious metals, which underscores the central role of bullion in financial markets. Despite focusing on the UK, this rule has global significance given the country’s central role in the global gold market.
The Bottom Line: Physical Beats Paper
All the technical jargon and obscure rules under Basel III can mask a simple yet profound shift in the banking system: physical bullion is preferred over paper gold. Allocated gold and non-tangible derivatives are subject to heightened capital requirements and other regulatory constraints, boosting the appeal of physical metal.
👉 Related Read: Paper Gold vs Physical Gold: Key Differences You Should Know Before Investing
Why Basel III Shines on Gold Now
The Bank for International Settlements (BIS) set these changes in motion nearly 15 years ago, so why are investors only now starting to take it more seriously? Here are a few key reasons:
Staggered Implementation
The organization might have approved guidelines in 2010, but it takes time for countries and individual banks to implement these changes. Now, changes are really starting to solidify and have a concrete impact on gold markets and institutional behavior.
Delayed Market Impact
All widespread, institutional changes have delayed effects. It also takes a while for analysts to connect the dots between these structural shifts and their impact on market dynamics. Experts are starting to recognize the gold-positive influence of Basel III’s rollout, such as higher central bank demand and steady upward price pressure.
Formalizing Narratives
Before the average investor can get a grip on market conditions, the bigwigs need to converge on a shared understanding of what’s happening. The historic institutional embrace of physical gold, the unprecedented rally, and the rapid rise in uncertainty have helped formalize a narrative on how Basel III quietly helped change the incentives.
Gold as the New Monetary Foundation
The yellow metal’s recent surge is easily tied to increasing inflationary pressures, heightened geopolitical tensions, and widespread market turbulence. Yet, there’s a deeper force at work.
Gold is experiencing its strongest reintegration into the global financial system since the adoption of the gold standard. The destabilizing domino effect of a global pandemic, two active wars, and, most recently, Trump’s all-out trade war has rattled the global economy and driven central banks deeper into gold.
Basel III’s changes are formalizing, incentivizing, and institutionalizing the growing embrace of gold as a foundation for an emerging world economy.
👉 Suggested Read: The Gold Standard: Everything You Need to Know