Basel III Tightens the Screws on Big Bank Bullion Trading
John Walter

For years, analysts of the precious metals market have argued that large financial institutions were able to dominate gold and especially silver pricing through highly leveraged trading on commodities exchanges. Essentially, creating enormous synthetic gold exposure with little-to-no physical metal behind it.

Whether you call it hedging, financial engineering, or (in some documented cases) outright manipulation one thing is undeniable: The structure of the commodities markets has long favored institutions that have access to cheap, short-term funding and massive balance sheets to draw from.

Basel III changes that equation. (See Peter Reagan’s analysis of Basel III and gold for additional background.)

Today I want to explain one specific way in which the new Basel III regulations may already be shaping metals markets. Not with a dramatic headline. 

But with something far more consequential: Capital rules and funding discipline.

Physical gold vs. paper promises: A regulatory divide

Like big banks themselves, Basel III is mostly about two things: Capital and risk. 

Many analysts took note of the “zero risk” rule applied to physical gold bullion. Properly structured physical gold can receive a 0% credit risk weighting in many jurisdictions. That means banks are not required to set aside additional capital against it to compensate for hypothetical credit-risk purposes. From a balance-sheet perspective, physical bullion is treated as carrying no counterparty credit risk.

Commodities contracts are a different story.

Gold-based financial derivatives, forwards, swaps and so on represent financial claims. They introduce counterparty risk. While these instruments remain legal and widely used, they are not given the same privileged credit risk weighting. That distinction alone shifts incentives.

When regulators differentiate between real physical metal and financial instruments that track gold's price, banks pay attention.

Leveraged bullion trading just got more expensive

The more significant change: Basel III’s Net Stable Funding Ratio (NSFR).

This rule requires banks to support certain assets with stable, longer-term (more expensive) funding instead of cheaper, short-term borrowing. Under these rules, gold derivative trades need funding requirements of roughly 85%. In practical terms, that means banks need more and costlier capital to maintain their bullion trades.

That matters. Historically, parts of the gold and silver futures market operated on short-term funding and lots of leverage. When short-term money was cheap and plentiful, institutions could run massive paper gold trades relative to underlying physical supply. And public reporting shows the massive scale of profits that resulted.

“Massive” profits isn’t an overstatement. For example, Bloomberg tells us the 12 leading banks made $500 million trading precious metals in the first quarter of 2025 alone. 

JPMorgan especially. That one bank alone made $1 billion trading precious metals in 2020, according to Reuters – from the same trading desk Bloomberg tells us the U.S. Department of Justice called a “crime ring” and a “racketeering operation.” JPMorgan gave most of those profits back when the Commodity Futures Trading Commission (CFTC) fined the bank $920 million for manipulating the precious metals market.

If you look at COMEX or NYMEX, you’ll mostly see familiar names. The too-big-to-fail, globally systemically important banks. Now, Basel III does not ban banks from trading precious metals. 

But it makes those trades both more expensive and less flexible. 

Commodities markets and credibility

Despite all the gimmicks, gold futures and derivatives markets really do serve legitimate purposes. They allow miners, for example, to hedge against downturns in price. Refiners to ensure future supply. Commodities markets aid in price discovery, now and in the months ahead. 

But markets function best when leverage doesn’t outweigh underlying supply to absurd extremes.

I expect Basel III to result in a closer alignment between the price paper trades and physical metal.

Importantly, that doesn’t guarantee higher prices.

It does, however, reduce the advantages that big banks’ trading desks once enjoyed when they could move markets with vast, highly-leveraged exposure with little cost.

In my view, that is a healthy and much-needed development.

What’s Basel III really about?

We’ve seen what happens when leverage builds quietly inside big banks. Basel III is designed to prevent that from happening again. 

Ultimately, Basel III is not a pro-gold policy. 

It’s a pro-stability policy. Regardless of their motives, regulators have constrained some of the more aggressive tactics we’ve seen in bullion markets.

Over time, that could lead to:

• Fewer highly-leveraged short-term gold trades
• Greater emphasis on fully allocated physical ownership
• A futures market that better reflects physical supply and demand

The global banking system after 2008 required stronger guardrails. That’s what Basel III represents.

If those guardrails also encourage a more credible and less distortion-prone gold market, that would be a welcome development. By itself, though, it’s not a revolution in gold and silver prices. But it does shift incentives. And when incentives shift, markets follow.

Phillip Patrick is a Precious Metals Specialist and spokesman for Birch Gold Group. Born in London, he earned a degree in politics and international relations from the University of Redding, and began his career as a wealth manager at Citigroup in London’s financial center. Since joining Birch Gold in 2012, Phillip has become a trusted voice on economic policy and precious metals, appearing as a guest on dozens of television and podcast platforms, including Newsmax, The Ben Shapiro Show, The Megyn Kelly Show, and Stephen K. Bannon’s War Room. In addition to his contributions on Birch Gold Group's blog, you can watch his interviews on Rumble and follow him on Gettr. 

 

 

www.birchgold.com