Will the new Basel III rules strongly affect the gold price?

The price of SJC gold bars is also traded in the range of VND 56.7-57.1 million a tael with a low trading volume in the previous week.

In the previous week, the confusion over FED’s hawkish message followed by FED Chairman Jerome Powell's dovish testimony has created a lot of volatility and uncertainty, which is keeping gold right below the $1,800 an ounce.

“The US economy is growing steadily, and this has been increasing inflationary pressure. However, the recent increase in U.S inflation to the highest level since 2008 is only transitory," said Fed Chairman Powell.

The U.S PCE index climbed 0.4% in May to record the third straight big increase, while economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% advance. Over the past year, PCE has shot up 3.9%. Although this increase in PCE was the highest since 2008, it was lower than expected, causing many investors to be cautious with FED’s above view.

In the Vietnamese gold market, the price of SJC gold bars is also traded in the range of VND 56.7-57.1 million a tael with a low trading volume in the previous week.

While new banking rules, part of an international agreement known as Basel III, come into effect today and mark a big change for European banks as well as their dealings with gold.

Under these new rules, physical gold or allocated gold, like bars and coins, will be reclassified a tier 3 asset to a tier 1 zero-risk one, putting it alongside with cash and currencies as an asset class. While paper gold will be classified as riskier than the physical one, and no longer equal to gold bars or coins.

The new rules will mainly impact European banks and their unallocated gold, as the majority of regular investors tend to hold physical gold.

The New Basel III rules will positively affect long term gold price.

In the short term, the said rules have not yet had a strong impact on the gold price, because European banks have started buying gold since 2017 when this regulation was issued. Global central banks alone bought 651.5 tons of gold in 2017 - the highest level in 50 years. In the long-term, the above regulation will significantly increase the gold demand of European banks in particular and central banks in general, including ETFs, especially the beginning of next year, this regulation will be also applied to the UK - the global hub for spot gold clearing and settlement. Moreover, the world's gold reserves are ed, if the demand for physical gold increases, it will push the price of gold higher in the long term. That is not to mention the demand for gold in industries, such as jewelry, dentistry, military, electronics... is increasing.

A gold analyst said that the Basel III agreement will have a major impact on the European banks and also on the UK banks. The Net Stable Funding Ratio requirement will make it difficult for banks and other institutions to keep unallocated gold. So, one of the likely solutions will be to allocate gold. The very fact gold will become a risk-free asset is highly bullish. It will make central banks and other investors raise their gold reserves. All this is highly advantageous for investors holding physical gold.

Although European banks have started to increase physical gold purchases since 2017, when new Basel rules come into effect, it will also create a positive sentiment for investors, causing them to return to gold. However, the short-term increase in gold price is not really sustainable because the FED has mixed views on inflation, affecting the psychology of investors. In the long term, the gold price is still forecasted to increase strongly, towards ​$​2,000 an ounce, forecasted a gold analyst.