This is a treble win for gold — it would be a major endorsement of its role in preserving wealth and as a store of value from the highest financial authority, it would lead to significant purchases of gold by major financial institutions and it would lead to a reappraisal of its value with respect to other Tier 1 capital such as quality sovereign debt. Under the new rules gold could become a very significantly larger proportion of a reserve pool which is about to grow very much larger.
The two questions that come to my mind are when and how much metal — on timing, Basel III kicks in from January 2013 with a further tightening in capital adequacy ratios in 2018. That said, it is not yet clear when gold's re-rating to Tier 1 might take place.
In terms of amount of gold that could be purchased, that is harder still — if we thought that say 2% of total current Tier 1 capital held by commercial banks globally might be converted into gold (forgetting for a moment about the increases in capital yet to be seen) — this would suggest that 2% of the $4,276 bn would be converted to gold. That is equivalent to $85 bn in gold, which at current market prices is equivalent to 1,700 tonnes of gold.
Another way of looking at this is to consider that commercial banks would be holding gold for precisely the same reason that central banks do — and the largest 110 central banks in the world have 16% of their reserves in gold — as such a figure of just 2% is really quite a modest expectation — ultimately it will be a question of price and expectations of price change that would determine the rate of uptake in the short term.
For those anxiously about the lackluster market, this could well promise to be game-changer of epic proportions.