Is Gold a High-Quality Liquid Asset? The Regulatory Gap Explained

Published: 06-25-2026, 04:02 pm | Updated: 06-25-2026, 04:03 pm

Key Takeaways

Allocated physical gold has carried a 0% risk weight in bank capital rules since 1988 — the same as cash and government bonds. [LBMA, May 2025]Even so, gold is excluded from the High-Quality Liquid Asset (HQLA) list. It cannot count toward the 30-day liquidity buffers banks must hold under Basel III. [Basel Committee on Banking Supervision, 2010]Under the Net Stable Funding Ratio, gold carries an 85% required stable funding factor. That is the same rate applied to commodities like corn and lead. [LBMA, May 2025]In June 2026, the London Bullion Market Association asked the Bank of England’s Prudential Regulation Authority to close this gap. It cited $510 billion in average daily global gold trading volume. [LBMA, June 2026]The direction of regulatory travel is toward greater recognition. Each step reduces the cost of holding gold on bank balance sheets — and increases institutional demand for physical gold.

Gold trades $510 billion every single day. [LBMA, Response to PRA CP5/26, June 2026] The London over-the-counter market alone accounts for roughly $230 billion of that. Its bid-ask spreads are comparable to major sovereign bond markets. Physical bars sit inside the Bank of England’s vaults, transferable between accounts in a single book entry.

By every practical measure of liquidity, gold behaves like a Tier 1 asset.

Banking regulations say it is not one. Not for liquidity purposes, anyway.

That contradiction is specific, documented, and now the subject of a formal regulatory petition. It is also one of the most consequential structural stories in precious metals today. Understanding it tells you something important about where institutional gold demand is heading.

What Does “High-Quality Liquid Asset” Actually Mean?

Banks must survive a 30-day funding stress without external support. That is the core requirement behind the Liquidity Coverage Ratio (LCR). The LCR is one of the two main liquidity rules in the Basel III framework, first published by the Basel Committee on Banking Supervision in December 2010. [BIS, December 2010]

To pass the test, banks must hold a buffer of High-Quality Liquid Assets — HQLA. These are assets that can be converted to cash quickly and without significant loss under stress. Qualifying HQLA includes cash, central bank reserves, and high-quality government bonds.

Gold is not on that list.

When regulators first published the LCR rules in December 2010, gold was omitted. The Basel Committee cited limited trading data and concerns about price volatility at the time. [BIS, December 2010] Although the rules have been updated multiple times since, gold’s exclusion has remained intact.

How Does Basel III Treat Gold for Capital Purposes?

Here is where the inconsistency begins.

Capital adequacy rules trace directly back to the original Basel Accord of 1988. Under those rules, allocated physical gold carries a 0% risk weight. [LBMA, May 2025] That is the same treatment given to cash and the highest-rated government bonds. The logic is straightforward: allocated gold in a vault carries no counterparty risk. It cannot default because it has no issuer.

Notably, that 0% risk weight has not changed across any of the three Basel Accords since 1988. [LBMA, “Gold and HQLA: Correcting Misleading Online Information,” May 2025] It is about as strong an institutional endorsement as a financial asset can receive.

And yet that same gold — the same bars, in the same vault — cannot count toward the 30-day liquidity buffer a bank must maintain under Basel III.

Capital rule: gold equals cash. Liquidity rule: gold is excluded.

This is not a technicality. It is a structural inconsistency in how the world’s most important financial rulebook treats the same asset.

What Is Gold’s Required Stable Funding Factor Under Basel III?

The second major Basel III liquidity rule, the Net Stable Funding Ratio (NSFR), made the gap worse.

Under the NSFR, banks must hold stable long-term funding in proportion to the assets they carry. Each asset class gets a Required Stable Funding (RSF) factor. The higher the factor, the more expensive the asset is to hold. Government bonds carry an RSF of 0% to 5%. Cash is 0%.

Gold’s RSF factor is 85% — the same as equities and physical commodities like corn and lead. [LBMA, “Gold and HQLA: Correcting Misleading Online Information,” May 2025] In practical terms, for every $100 million of gold a bank holds, it must maintain $85 million in stable funding — equity, long-term debt, or stable deposits — as a backstop.

That is a real cost. It flows directly into the price of holding gold on a bank’s books.

Regulators justified the 85% RSF on the grounds that gold behaves like a commodity. The trading data, however, increasingly argues otherwise.

What Does the Trading Data Say About Gold’s Liquidity?

Average daily global gold trading volumes reached approximately $510 billion through end-May 2026. The London OTC market accounted for roughly $230 billion of that total. [LBMA, Response to PRA CP5/26, June 2026]

For context, the US Treasury market — the benchmark for liquid asset classification — trades approximately $600 to $700 billion per day. Gold is not at that level. However, it is in the same order of magnitude. Moreover, gold’s behavior during stress events looks far more like a sovereign bond than a commodity.

Academic research published in 2025 by Professor Dirk Baur and co-authors measured gold’s liquidity against top-tier government bonds. They used bid-ask spreads, trading volumes, and the Amihud illiquidity ratio. Gold’s Amihud score was 0.102, while US Treasury bonds ranged from 0.055 to 1.321 depending on maturity. [LBMA, citing Baur et al., 2025] As a result, the World Gold Council concluded in June 2025 that gold “is an HQLA in all but name.” [World Gold Council, “Does Gold Qualify as an HQLA Under Basel III?”, June 2025]

The stress data reinforces this finding. During the last week of January 2026, gold prices pulled back sharply amid geopolitical volatility. Even so, average daily trading volumes across major venues hit $965 billion per day — the highest level ever recorded. OTC activity averaged $395 billion per day, up 41% week-over-week. [World Gold Council, “Has Gold’s Performance Structurally Changed?”, April 2026]

The market did not seize. It surged.

What Is the LBMA Asking the Bank of England to Do?

In March 2026, the Prudential Regulation Authority published Consultation Paper CP5/26. Its focus was on modernizing the liquidity framework around “operational readiness” — specifically, how quickly banks can access assets under stress. [Bank of England, CP5/26, March 2026] The consultation closed June 17, 2026.

That framing gave the LBMA a direct opening.

Many PRA-regulated banks already hold allocated gold accounts at the Bank of England itself. That gold sits inside the central bank’s custody system. It is transferable between account holders on the Bank’s books and can be monetized through OTC sales, swaps, or exchange trading within the same business day. By the PRA’s own emerging standard for usable liquidity, this gold is as operationally ready as any asset a bank holds.

And yet it cannot count toward the bank’s central bank drawing capacity — despite being physically inside the central bank’s vault.

The LBMA’s request to the PRA covers three areas: first, provide guidance on how banks should treat BoE-held gold in internal liquidity assessments; second, ask firms to document gold’s monetization performance under stress; and third, evaluate over time whether allocated gold at the BoE should become eligible as central bank collateral. [LBMA, Response to PRA CP5/26, June 2026]

Why Does This Matter for Physical Gold Owners?

Gold’s regulatory gap between capital treatment and liquidity treatment is not an accident. It reflects decisions made in the early 2010s, when gold’s trading infrastructure was less transparent and stress-period data was limited. That data now exists, and it points one way.

Every time regulators close part of this gap, the cost of holding gold on bank balance sheets falls. Lower holding costs increase institutional demand. Greater institutional demand, against a relatively fixed supply, is structurally price-positive.

Furthermore, when the UK implemented the Basel III NSFR rules on January 1, 2022, bullion banks shifted away from unallocated gold and toward allocated physical gold — actual bars in actual vaults. [Bank of England, PS9/24, September 2024] That structural shift increased demand for physical custody. The LBMA’s CP5/26 filing is the next chapter in the same sequence.

Central banks bought more than 1,000 tonnes of gold in each of 2022, 2023, and 2024 — the three highest annual totals on record. [World Gold Council, Gold Demand Trends Full Year 2025] Purchases moderated to 863 tonnes in 2025, still nearly double the long-run average of 473 tonnes per year from 2010 to 2021. [World Gold Council, Gold Demand Trends Q1 2026, April 2026] They were not buying despite gold’s regulatory treatment. Rather, they were buying in part because of it. A 0% capital risk weight, unchanged since 1988, gives gold a position in sovereign reserve frameworks that no other commodity holds.

The LBMA is now asking commercial bank regulators to apply that same logic to liquidity rules.

Is Gold Actually a High-Quality Liquid Asset?

As of June 2026, gold is not formally classified as a high-quality liquid asset under Basel III. The LBMA has stated explicitly: “gold is not due to be reclassified as a Level 1 HQLA — no official announcement has been made or is expected.” [LBMA, “Gold and HQLA: Correcting Misleading Online Information,” May 2025] Claims circulating online since 2025 that gold was reclassified effective July 1, 2025 are incorrect.

In practice, however, the picture is more nuanced. By empirical measures of liquidity — bid-ask spreads, trading volumes, and stress-period behavior — gold meets the characteristics of a Level 1 HQLA in all but regulatory name. [World Gold Council, June 2025] Both the LBMA and the WGC continue to advocate with regulators for formal reclassification.

The gap between what the rules say and what the data shows has been narrowing for a decade. Consequently, the LBMA’s June 2026 filing is the most direct institutional push yet.

The direction of travel is clear, even if the timeline is not. For holders of physical gold, the regulatory structure is catching up to what the asset has always been.

People Also Ask

What is the difference between allocated and unallocated gold, and why does it matter for bank regulation?

Allocated gold means specific, numbered bars held in a vault that are legally owned by you. The bank has no claim on them. Unallocated gold, by contrast, is a credit relationship: you hold a claim on a bank for a quantity of gold, but no specific bars are set aside. Under Basel III’s NSFR, unallocated gold carries an 85% required stable funding burden. [LBMA, May 2025] When a bank custodies allocated gold for a client, that gold sits off the bank’s balance sheet entirely — which changes the NSFR treatment. This is one reason the UK’s January 2022 NSFR implementation pushed the London market toward physical allocated custody. [Bank of England, January 2022] It matters for individual investors and for how the banking system prices gold.

If gold were officially added to the HQLA list, what would happen to demand?

The most direct effect would be on institutional demand. Currently, gold held by a bank cannot count toward its required liquidity buffer. It therefore competes on the balance sheet with HQLA-eligible assets like government bonds. If gold received HQLA recognition, banks could hold it as part of that buffer — removing a structural disincentive to hold gold at scale. The World Gold Council has argued that recognition would reduce institutional holding costs and meaningfully increase demand, though the precise figure depends on haircut levels. [World Gold Council, June 2025] There would also be a financing effect: lower NSFR burdens would reduce carry costs for bullion banks, which currently flow through to clients as wider spreads on gold lending and leasing. [LBMA, May 2025]

How does the Liquidity Coverage Ratio work, and where does gold fit today?

The LCR requires a bank to hold enough HQLA to cover projected net cash outflows over a 30-day stress period, at a ratio of at least 100%. [BIS, December 2010] Because gold is not eligible for the list, a bank holding gold on its own balance sheet cannot use it toward this requirement. Instead, it must fund the liquidity buffer entirely with other assets — government bonds, central bank reserves, or cash. Gold held at the Bank of England on an allocated basis for clients sits off the bank’s balance sheet, so it does not affect the LCR calculation in either direction. That is precisely why the LBMA focuses its argument on BoE-held gold: it already sits within central bank infrastructure, making it the most operationally ready gold to recognize as usable liquidity. [LBMA, June 2026]

Does silver face the same regulatory gap as gold?

Yes, and the gap is wider in some respects. Silver carries the same 85% NSFR required stable funding factor as gold and is also excluded from the same list. [LBMA, May 2025] Unlike allocated gold, however, silver has never received a 0% capital risk weight under the Basel Accords. Its capital treatment is therefore less favorable. Silver also lacks the sovereign custody infrastructure underpinning the LBMA’s case: the Bank of England holds gold for central banks and PRA-regulated institutions, but does not hold silver. No equivalent institutional advocacy effort currently exists for silver, and the academic literature on silver’s stress-period liquidity is thinner. The regulatory momentum story for silver is real — but it remains at an earlier stage, depending on gold establishing the precedent first.

What is Basel IV, and could it change gold’s regulatory treatment?

Basel IV — formally “Basel III: Finalising Post-Crisis Reforms,” also known as Basel III Endgame in the US and Basel 3.1 in the UK — was agreed by the Basel Committee on Banking Supervision on December 7, 2017. [Basel Committee on Banking Supervision, December 2017] Its focus is on standardizing how banks calculate risk-weighted assets. It does not, however, directly change gold’s HQLA status or NSFR treatment. Implementation has slipped repeatedly: the UK delayed Basel 3.1 to January 2027, and the US timeline remains unclear as of 2026. [Bank of England, January 2025] Each delay creates a policy window. Consequently, the more likely near-term path for gold is through national regulator decisions — such as the PRA’s response to CP5/26 — rather than through Basel IV itself. [LBMA, June 2026]

SOURCES1. LBMA — Response to PRA Consultation Paper CP5/26: Modernising the Liquidity Policy Framework, June 20262. LBMA — Gold and HQLA: Correcting Misleading Online Information, May 20253. World Gold Council — Gold Demand Trends Full Year 2025; Gold Demand Trends Q1 2026; Does Gold Qualify as an HQLA Under Basel III? (June 2025); Has Gold’s Performance Structurally Changed? (April 2026)4. Bank of England — CP5/26: Modernising the Liquidity Policy Framework, March 20265. Bank of England — PS9/24: Implementation of the Basel 3.1 Standards, September 20246. Basel Committee on Banking Supervision — Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, December 2010 / January 2013

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Always consult a qualified financial adviser before making investment decisions.

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