Basel III is not a game-changer for gold prices and will lead to higher costs and lower liquidity - Bank of America
(Kitco News) - Many gold analysts have been getting excited about the prospect of strong physical demand coming to the v market as banks holding the precious metal will have to meet new funding ratio requirements under the Basel III agreements.
However, commodity analysts at Bank of America are not expecting the new regulations to increase gold demand. Instead, the bank sees costs in the gold market going up and liquidity falling.
According to analysts, the biggest issue in the gold market regarding the new Basel III requirements is unallocated gold holdings. Bank of American analysts explained customers who hold gold in unallocated accounts are essentially are an unsecured creditor.
"Gold held in unallocated accounts, similar to currency deposited, can be used by banks for their normal conduct of business. As such, unallocated gold is fungible and can be used to clear and settle physical metal transactions. Because of this, it provides the liquidity essential for the clearing and settlement system," the analysts said.
Under the new Basel III rules, banks that hold unallocated gold will have to have a Required Stable Funding (RSF) factor of 85%.
Bank of American said that faced with the new funding requirements, bullion banks are more likely to either increase transaction costs or reduce their exposure in the precious metal sector.
"In our view, rising funding requirements for unallocated gold means that financial institutions 1) either reduce the bullion business or 2) sustain activity and put more funding aside. Either way, we don’t think that these dynamics are bullish for gold as such, also because it seems unlikely that banks would support their business by purchasing gold outright, rather than using unallocated gold," the analysts said.
Bank of America has been neutral on gold prices since the start of the year. The Bank currently expects gold prices to average this year around $1,845 an ounce.