BSP adopts opportunistic gold strategy

Published September 14, 2020, 5:00 AM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) will accelerate its gold purchases and will be more opportunistic in its gold trading, according to its highest-ranking official.

MB File

“BSP will be opportunistic, sell when gold prices are high,” said BSP Governor Benjamin E. Diokno over the weekend. He said that in past months the central bank’s domestic gold purchases from small miners have “picked owing to the passage of the ‘Gold Law’” or Republic Act No. 11256 (An Act to Strengthen the Country’s Gross International Reserves). Its implementing rules and regulations (IRR) was approved last April.

The BSP’s gold reserves is currently about 13 percent to GIR or $12.6 billion out of the $98.6 billion GIR as of end-July, more than the 10 percent gold to GIR ratio which was considered as ideal.

“The BSP may have to increase its gold holdings depending on the market conditions,” said Diokno. Similar with other central banks facing economic difficulties because of the pandemic, the BSP is stockpiling on foreign reserves particularly gold as a GIR composition.

But, he added, “(we are) not targeting a specific ratio, although studies show that 10 percent of GIR seems to be optimal.

In July, the central bank’s stock of gold increased from $8 billion which it has been reporting since June 2019 to $12.6 billion after the Monetary Board approved a shift from a passive to an active strategy in the management of gold reserves. The shift revised the way gold is measured from amortized cost to fair value, translating to a gold revaluation of $4.6 billion.

Maintaining a ratio of 10 percent of gold to the GIR was one of the reasons the BSP adopted a passive strategy in its gold holdings.

The BSP, however, are price takers in gold and the market is currently volatile amid the pandemic and global economic instability.

Diokno said the 10 percent ratio is merely a “guide rather than an explicit target since we cannot control the price of gold and other assets in the GIR.”

“The (current) ratio of gold to GIR … is slightly higher than our internal studies suggest to be optimal,” he said in his virtual “GBED Talks” last Thursday. “With the expected improvement in domestic supply and higher gold prices, this may allow us to reduce gold holdings but as I mentioned these ratios tend to move around so we do not really consider this as an outright target.”

“For the BSP, gold has always been a significant part of the GIR, and we expect this to continue moving forward,” he said.

In 2018, the Monetary Board decided on a passive approach to gold management for insurance and security. This decision led to a frozen BSP gold holdings of $8 billion. But with the rising global gold prices, the BSP could no longer keep the 10 percent gold to GIR ratio which was what the passive strategy was all about.

Diokno said gold holdings have not moved for a year because the BSP has also not made any “large purchases” locally while waiting for the IRR. He said however that the BSP has seen a “significant improvement in the volume of gold purchases in the past few months immediately after the IRR was put in effect. And this is partly the reason why in July this year the Monetary Board approved the active management of BSP gold reserves.”

The GIR reached its highest level of $98.6 billion in July because of the net positive revaluation on reserve assets amounting to $6.6 billion that includes the marking-to-market of gold holdings, he added.

“Given the significant movement of gold prices over the past two years — 27.44 percent increase in 2019 and another 18.31 percent from year-to-date this year – and the expected increase in domestic gold purchases because of RA 11256, the BSP expects that gold will continue to support the country’s GIR,” said Diokno. “These two factors, higher gold prices and expected rise in domestic gold buying, explain why the BSP opted to adopt an active management strategy from our gold holdings from the original passive strategy.”

Bulk of GIR composition or 82 percent are in fixed income securities, 13 percent are gold reserves and the rest are International Monetary Fund holdings.

“While our gold holdings are sizeable in absolute levels, on a relative basis they are still a small portion of the reserves,” said Diokno. “The level of the GIR will depend on many things, one of which the domestic purchases of gold. If domestic gold purchases go up significantly, and the price of gold in the international market continues to be at current levels, then this will gradually increase the GIR.”

The central bank considers the GIR level “ample liquidity buffer” that is sufficient to “cushion the domestic economy against external headwinds such as the global financial crisis and the current COVID-19 pandemic.”

The GIR is a standby supply of foreign exchange assets that the BSP can tap to provide banks when they do not have enough US dollars to address the requirements of both the public and private sector.