(Kitco News) - Geopolitical chaos and growing economic uncertainty continue to drive demand for gold and are helping to reestablish its role as an important monetary asset. However, growing enthusiasm among analysts can result in misleading information in the marketplace, according to official comments from the London Bullion Market Association.
Rumors that gold will be recognized under Basel III rules as a Tier-1 liquid asset by July 1 have been spreading like wildfire through the gold market. However, on Wednesday, the LBMA said these rumors are incorrect.
“Gold is not due to be reclassified as a Level 1 HQLA [high-quality liquid asset] – if it were, we and the WGC [World Gold Council] would be the first to shout about it. LBMA continues to advocate with the central bank and prudential regulatory community that gold meets all criteria to warrant HQLA status,” the LBMA said.
Analysts have speculated that an official rerating of gold under Basel III regulations could drive investment demand for the precious metal significantly higher through the rest of the year.
However, the LBMA said this impression results from misunderstandings of Basel’s view on gold. The LBMA noted that since 1988, gold has always been recognized as a Tier-1 asset; however, it is not recognized as a high-quality liquid asset.
The LBMA has been lobbying for years to have gold recognized as a Level 1 HQLA, which is different from its Tier-1 status.
At the same time, Basel also has different categories for gold. Allocated gold held in bank vaults is considered a Tier-1 asset, holding the same recognition as cash. However, gold held as collateral among clearing houses is subject to a 20% reduction in value.
Because it is not considered an HQLA, unallocated gold is treated like other commodities and is subject to an 85% required stable funding (RSF) factor and a 0% available stable funding factor under the Net Stable Funding Ratio (NSFR) rules.
Despite its aggressive lobbying in favor of gold as an HQLA, the LBMA doesn’t have a timeline for its goal. The association noted that the European Union, U.K., and U.S. have consistently delayed the implementation of the final Basel III rules.
“The EU has delayed some of the key reforms to January 2026. The U.K. has delayed implementation to 2027, and in the U.S., given the current political landscape, which favors less regulation and heavy lobbying, the timetable is unclear,” the analysts said.
Gold should be recognized as an HQLA
Last month, the LBMA and the World Gold Council published a research paper highlighting why gold should be recognized as an HQLA.
“Recent market events have shown that many investors already utilise gold as a liquidity buffer as it has proven to be an asset that performs well during financial stress events,” wrote David Gornall and Edel Tully, the coauthors of the report. “Investors use gold as a liquidity asset because it can be easily traded and valued and is widely accessible through different market access points. The two biggest attributes for an investor are gold’s negative correlation with risky assets and the overall trust factor gold holds.”
Gold’s role as an important monetary asset has grown considerably over the last three years as central banks have increased their reserve holdings at a record pace. Global central bank gold reserves have increased by more than 1,000 tonnes in each of the last three years.
Analysts have noted that central banks are buying gold to diversify away from the U.S. dollar.
Most recently, investment demand for gold has picked up significantly. However, data shows that one segment of the market continues to ignore the precious metal: pension funds and other public investment firms have little exposure to it.
The LBMA/WGC paper noted that in a world of growing geopolitical uncertainty, gold could be an important liquid asset.
“The current status quo of HQLAs has created an overly correlated sovereign-bank nexus,” the analysts said. “Gold has a more diverse and geographically dispersed holding base than other HQLA assets, enhancing its stability, with no credit or default risk.”
