BSP now an active gold trader

Published September 7, 2020, 5:00 AM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the BSP has shifted to active gold trading to maximize its gold reserves amid higher prices of gold and a rising buffer stock.

“The Monetary Board has decided to shift from passive (done before I assumed office) to active trading largely because of the change in the price dynamics of gold,” said Diokno over the weekend.

Diokno compared the price of gold before of about $1,400 per fine troy ounce (FTO) to $2,000/FTO today.

He cited Republic Act No. 11256 otherwise known as an Act to Strengthen the Country’s Gross signed into law by President Duterte on March 29, 2019 which enabled the BSP to accumulate more gold reserves. He said the law will contribute to increase the country’s gross international reserves (GIR).

The law exempts the gold sale to the BSP from excise and income tax from small-scale mining activities. The sale of gold by small-scale miners to accredited traders is also exempted since these will eventually end up with the BSP.

Diokno also said that the GIR of almost $100 billion, a record high, is another reason for the BSP to actively engage in gold trading.

“The Monetary Board sees the need to better manage the country’s international reserves. Studies show that the optimal portfolio mix of gold to GIR should be 9.8 percent,” the BSP chief said.

He cited a Word Bank survey that the average allocation of gold as reserves should be about 9.55 percent. A report from the World Gold Council, in the meantime, said that “a portfolio with 10 percent allocation to gold had a higher risk adjusted return compared to zero percent of five percent allocation.”

“At the moment, the ratio of gold to GIR exceeds 10 percent,” said Diokno. “BSP will always be opportunistic in its reserves management.”

As of end-July, the GIR has climbed to $98.6 billion, an increase of $5.13 billion from end-June’s $93.47 billion because of gold revaluation. The BSP’s gold reserves stood at $12.59 billion compared to the previous $8.01 billion which it has been reporting since June last year.

In July, the Monetary Board reverted to an active strategy in the management of gold reserves. This change revised the way gold is measured from amortized cost which was at $1,259.66/FTO, to fair value, at $1,979.35/FTO as of end-July, said the BSP. “This resulted in total revaluation gains of $719.69/FTO or a total of $4.58 billion,” it noted.