Basel 3.1 and gold

There is confusion over the treatment of gold in Basel 3 bank regulations, with rumours that when Basel 3.1 is adopted in the US it will lead to physical demand. It is barely relevant.

This article is written at the prompting of some of my Substack subscribers, following an article by Rafi Faber, admitting that he was confused by banking regulations with respect to gold bullion. It is hardly surprising, because the only people who fully understand Basel 3 and Basel 3.1 (sometimes referred to as Basel 4) are banking regulators and the financial officers of banks. It is certainly beyond the lighter grasp of investors.

In this article, I attempt to unravel this mystery in language as non-technical as possible. Please bear in mind that the relevant Basel regulations cover bank balance sheets, which have assets on one side, which includes loans to customers and other banks, ownership of government securities, and corporate bonds. On the liabilities side is the bank’s equity capital comprised of shares, shareholders’ funds, and qualifying bonds. It also includes customers’ current accounts and deposits and loans by outsiders to the bank.

These regulations concern banking activities, not to be confused with market-making in securities. I also leave derivatives out of this article, notwithstanding their importance in precious metals markets, which is a complicated topic on its own.

Read this twice to banish any doubts about the role of gold in banking.