(Kitco News) - The debate over gold’s role in global financial markets remains far from settled, even as economic uncertainty and geopolitical chaos reignite investment demand.
Although gold is recognized as a Tier-1 asset under Basel III rules, it is still not accepted as a high-quality liquid asset (HQLA)—a key classification that the World Gold Council (WGC) seeks to change.
In its latest report, analysts at the World Gold Council recommend that the Basel Committee on Banking Supervision (BCBS) revisit gold’s classification and recognize it as an HQLA, citing the significant market volatility seen so far this year.
“In recent months, amid trade policy uncertainty, financial markets experienced a decidedly volatile period marked by sharp declines in stock prices, an uncharacteristic selloff in U.S. Treasuries, and a general widening of bid-ask spreads,” the analysts stated in the research paper. “Against this backdrop, gold confirmed what previous research studies have found: it is a highly liquid and orderly market that mitigates market risk in a manner often associated with assets classified as High-Quality Liquid Assets (HQLAs).”
Currently, Basel categorizes gold in different ways. Allocated gold held in bank vaults is considered a Tier-1 asset, enjoying the same recognition as cash. However, gold held as collateral among clearing houses is subject to a 20% reduction in book value.
Because it is not classified as 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.
The WGC noted that over the past six months, gold has once again demonstrated many of the key characteristics that assets must possess to qualify as HQLAs.
U.S. Treasuries—specifically 10-year and 30-year bonds—are among the most recognized top-tier HQLAs. However, the WGC pointed out that gold has kept pace with these stable assets in recent months.
“Using intraday minute-by-minute data, we find that gold’s average daily volatility is 0.027%. This is above the volatility of the 10-year on-the-run (OTR) Treasury notes at 0.016%, but in line with 30-year OTR U.S. Treasury bonds at 0.028%,” the analysts said.
Not only is gold’s volatility comparable to that of U.S. Treasuries, but its market is also extremely precise, with a narrow bid-ask spread.
“On average, gold’s intraday bid-ask spreads came in at roughly 2.2 basis points—slightly wider than the 10-year Treasury’s 1.8 bps but tighter than the 30-year Treasury’s 3.3 bps,” the analysts said. “Gold’s ability to maintain or even tighten its spreads during periods of heightened volatility underscores its depth and resilience as a liquid asset.”
The WGC also noted that the gold market has a deep pool of liquidity, comparable to that of U.S. bonds.
“Gold’s LBMA OTC average daily trading volume between November 2024 and April 2025 was US$145 billion per day. This compares favorably to U.S. Treasuries with durations between 7 and 10 years, which averaged US$143 billion over the same period. For longer-dated Treasuries (over 20 years), the average daily volume was lower, at US$72 billion,” the analysts said.
According to many analysts, gold is seeing renewed investor demand because it is seen as the last safe-haven asset standing, as unstable global debt levels and rising inflation make bonds less attractive. It’s not just the U.S. experiencing rising long-term yields—Japan has also seen two disappointing long-dated Treasury auctions in recent weeks.
“Unlike many other assets, gold is universally recognized, free from credit risk, and accepted across borders, making it uniquely suited to meet the global and stress-tested liquidity standards required for Level 1 classification,” the WGC said.
The WGC’s report comes a few weeks after the European Central Bank (ECB) published a paper questioning gold’s role as a safe-haven asset, warning that renewed investment demand for gold could potentially destabilize markets.
“Should extreme events materialize, there could be adverse effects on financial stability arising from gold markets. This could occur even though the aggregate exposure of the euro area financial sector appears limited compared with other asset classes, given that commodity markets exhibit a number of vulnerabilities. Such vulnerabilities have arisen because commodity markets tend to be concentrated among a few large firms, often involve leverage, and have a high degree of opacity due to the use of OTC derivatives,” the ECB said.
The statement drew attention, but many analysts argue it misrepresents the situation. The WGC’s research shows that while volatility has increased, the gold market remains liquid and relatively stable compared to other asset classes.
