The impact of Basel III on physical bullion liquidity

The Net Stable Funding Ratio requires a bank to hold stable funding against assets it cannot liquidate instantly. Unallocated precious metal positions were assigned a required stable funding factor of 85%, in line with other commodities, rather than the near-zero factor applied to cash-equivalent instruments.

In practice that means a bullion bank carrying an unallocated book must fund 85% of it with long-dated liabilities. That funding is not free. The cost lands somewhere, and the somewhere is the bid-offer spread quoted to clients.

Allocated metal sits off the bank's balance sheet: the client owns identified bars and the bank is a custodian. Unallocated metal is a liability of the bank, and after the rule change it became an expensive one.

The visible result across the market has been a structural widening of unallocated spreads relative to allocated storage fees. Where an unallocated account was once the cheapest way to hold exposure, allocated custody at 0.10–0.15% per year is now frequently competitive on a total-cost basis for anything held longer than about eighteen months.

• Unallocated: cheap to open, spread-heavy, counterparty exposure to the bank
• Allocated: explicit annual fee, bankruptcy-remote, no balance-sheet drag to pass on
• Pooled: a middle case — segregated in aggregate, not by serial number

If you are buying monthly and holding for a decade, the annual custody fee dominates and the entry spread barely registers. If you are trading around a position, the reverse is true. This is why a single headline premium number is close to useless without a holding period attached.

Our comparison table normalises both sides — the premium paid on the way in and the fee charged every year — so the trade-off is visible rather than inferred.

It is worth writing the chain out explicitly, because each link is boring on its own and the aggregate effect is not. A capital rule raises the funding cost of an unallocated book. The desk carrying that book widens its two-way price to recover the cost. Wholesale clients — refiners, coin distributors, digital platforms — buy at that wider price. Their own margin sits on top. By the time a retail buyer sees a number on a product page, the bank rule has been marked up three times.

This is why comparing a retail premium to the London fix and calling the difference ‘dealer greed’ misreads the plumbing. A meaningful share of that gap is the cost of balance sheet, insurance and logistics, and it moves when regulation moves rather than when sentiment does.

• Rule raises required stable funding on the unallocated book
• Market-making desk widens bid–offer to fund the position
• Wholesale distributor prices off the wider quote and adds margin
• Retail premium absorbs all of it, plus fabrication and shipping

Platforms responded in two directions. Some leaned into allocated custody, marketing bankruptcy-remoteness as the product and charging an explicit annual fee for it. Others kept a spread-based model and absorbed the funding cost by holding less inventory, which shows up to customers as longer settlement windows and tighter purchase limits during volatile weeks.

Neither model is inherently better. But the two fail differently under stress: the fee model gets more expensive the longer you hold, while the spread model gets more expensive precisely when you most want to trade. Knowing which one you are in tells you which risk you have actually bought.

You do not need access to bank filings. Take any platform’s live two-way quote on a one-ounce order and compare the buy price and the sell price on the same screen at the same minute. That round-trip spread is the number the rule ultimately touches, and it is the only cost figure a platform cannot present selectively.

Run the same test at 09:00 London, at 14:30 when US data prints, and late on a Friday. A platform whose spread triples during the New York overlap is telling you something about how it funds inventory that no marketing page will.

• Record the buy and sell quote for the same size, same minute
• Repeat across three times of day and one high-volatility print
• Add the annual custody fee for your intended holding period
• Only then compare platforms against each other