LONDON(BullionStreet): Basel 3 rules helped the yellow metal to increases it's value in the eyes of investors and the banks, analysts said.

They added that the rule also put an increasing demand on gold as many financial institutions around the world start buying up gold reserves to fill the 2% or more void in their Tier 1 investments.

The Basel Committee on Banking, the body that sets the standards followed by the industrialized world’s central banks and the commercial banks they oversee, has reclassified gold bullion as a “tier one asset.” with 100% weighting.

Meaning gold bullion and cash will be equivalents in their acceptance as money.In addition to that, Basel III will also increase the amount of capitals banks must hold from 4% of Tier 1 holdings to 6% of Tier 1 holdings.

The endorsement that BASEL III gives to gold not only increases gold’s value in the eyes of investors and the banks, it puts an increasing demand on gold as many financial institutions around the world start buying up gold reserves to fill the 2% or more void in their Tier 1 investments.

The impetus supplied by Basel III could have a tremendous impact on gold prices.Once banks are on board and purchasing gold, it also gives gold credibility as a wealth preserving property, and as a store of value. If banks stock up on gold, it could drive gold prices through the roof, which will further stimulate investor demand.

Previously, according to the dictates of Basel I (in 1988) and Basel II (in 2004), gold was a “tier three asset”, counted at only 50 percent of market value on the banks’ books. Interestingly, those same Basel I and Basel II rules valued government bonds and mortgage backed securities (“MBS”) as “tier one” assets.

As such, they were counted at 100 percent of face value. Basel I and Basel II were based on the now debunked belief that sovereign bonds were as good as cash. In fact, for banks, those bonds were even better than cash, as bonds carried an interest rate while acting as bank reserves.

Basel III is an attempt to harden banks’ balance sheets against another financial meltdown. The more gold a bank acquires, the more likely that bank will survive the next wave of sovereign defaults, either through outright inability to pay (such as Greece, as long as it retains the Euro) or debt monetization (like the endless “quantitative easing” programs of the U.S. Federal Reserve).