Gold as a Tier One Asset

With its full adoption in the U.S. set for July 1st, 2025, the reclassification of physical gold as a Tier 1 asset under the implementation of Basel III regulations is a tectonic event for the entire gold market.

Developed by the Basel Committee on Banking Supervision in response to the 2007-2008 financial crisis, the international banking regulatory reform is implementing new regulations on the global gold market. These reforms are redefining gold’s role within financial institutions and Basel III aims to strengthen the resilience of the banking sector.

Historically, gold has taken a back seat in bank regulations. Previously, Basel frameworks categorised gold as a Tier 3 asset, resulting in banks carrying substantial capital to cushion its perceived risk. Under Basel III, allocated physical gold is classified as a Tier 1 asset, equivalent to cash. The reclassification assigns physical gold a zero-risk weight, meaning banks can hold it without having to factor in additional capital demands. Unallocated gold without physical backing will face stricter management. The Basel III Net Stable Funding Ratio mandates that unallocated gold 85% of value needs to be assigned by stable funding only. As a result, gold derivatives will become less attractive as banks shift towards physical gold.

Physical gold being reclassified as a Tier 1 asset, along with the regulatory push towards vaulting physical gold, heralds the shift from paper dominance and pricing that is less influenced by the derivatives market. From this, we are seeing the accelerated accumulation of physical gold, which is likely to ramp up as the U.S. approaches its July 2025 deadline.

The transition initiated by Basel III has considerable indications for gold’s market dynamics. As we watch central banks increase their gold reserves, as seen in the current repatriation of gold being flown daily from the Bank of London to the New York Federal Reserve, proactive preparation for compliance with Basel III is well underway. This manoeuvre has enormous ramifications on the paper gold markets which have long held dominance in pricing dynamics. Unallocated gold contracts, commonplace in the LBMA, have amplified supply through synthetic instruments and as banks are forced to move away from paper and the market experiences a withdrawal in paper liquidity, a renewed focus will be for investors to physically hold metals. 

Basel III enhances gold's attraction as a safe-haven asset for investors. A zero-risk bearing, tier 1 asset, solidifies gold’s place as a hedge against inflation and economic fluctuations. We wait to see how the market adjusts to possible short-term volatility as a result, as the price discovery mechanisms recalibrate to include reduced paper gold and the now increasing physical gold demand.

Basel III is an important moment for the gold market, diminishing the dominance of paper gold and enhancing the role of physical gold as a Tier 1 Asset. Banks will become increasingly reliant on physical gold as they adapt to Basel III capital and liquidity rules. This could boost prices and enhance gold’s reputation as a top-tier asset. As we approach the July 2025 deadline, Basel III looks set to steer the future trajectory of gold.