Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few, gold has been the asset of last resort.—Anthony C. Sutton
Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law!
Back in 2016, I cited the Bangko Sentral ng Pilipinas (BSP) as one of the principal reasons why the war on mining will fail. [Why the War on Mining Will Fail! June 26, 2016]
“Of course, another reason why mining won’t likely be totally banned is because the Bangko Sentral ng Pilipinas not only buys gold from the miners (even illegal miners), they get revenues from sales to them!
“So I expect the BSP to oppose a total ban.
Last week, the political leadership enacted the BSP’s Gold Bill!
The BSP today announced that Republic Act (RA) No. 11256, An Act to Strengthen the Country’s Gross International Reserves (GIR), was approved by Congress and signed by President Rodrigo R. Duterte last 29 March 2019.
The new law exempts from excise and income tax the sale to the BSP of gold sourced from small-scale mining activities. The measure also covers the sale of gold by small-scale miners to accredited traders for the eventual disposal to the central bank.
R.A. No. 11256 seeks to remedy the 99% drop in BSP’s domestic gold purchases from more than 900 thousand fine troy ounces (FTO) in 2010 to around 10 thousand FTO in 2019 as a result of the taxation of the sale of gold to the BSP beginning July 2011.
The tax regime under R.A. No. 11256 would allow the BSP to increase its purchases of domestic gold to further build up the level of the Philippines’ GIR, which serves as the country’s primary buffer against external economic shocks. An increase in BSP’s gold purchases using pesos leads to a net increase in the GIR, thereby improving the country’s economic standing and lowering the cost of both funding for the Republic as well as doing business for the private sector. It also prevents the smuggling of Philippine gold through the black market to other countries and allows small-scale miners and traders to sell gold at international market prices.
So the BSP (and the leadership) admitted to the following:
First, the domestic mining industry IS the primary source of gold for the BSP, which it uses to manage its balance sheet.
Second, the massive backlash of excise taxes on the industry, and thus its UTTER failure!
This excerpt signifies an awesome confessional: “R.A. No. 11256 seeks to remedy the 99% drop in BSP’s domestic gold purchases…a result of the taxation of the sale of gold to the BSP beginning July 2011.”
The amount of gold sold by small-scale miners and traders to the Philippine central bank in the second quarter plunged 98 percent from a year earlier, according to the latest government data. By law, all gold produced by miners such as Mulato in the Philippines should be sold to the central bank at around world market prices.
It has been an accelerating trend over the past year. The data shows central bank gold purchases dropped an annual 4 percent, 76 percent and 88 percent in the second, third, and fourth quarters of 2011, respectively. It fell 92 percent in the first quarter.
Small-scale gold mining output, is the main source of the central bank's gold reserves, which hit a record high of $10.4 billion early this year.
For authorities, it would be better to “police” than to waive taxes. This assumes that smuggling or the informal sector will be curtailed by mere regulatory enforcement, yet the above already demonstrates their helplessness: note the phrase “become so overwhelming it can do little about the smuggling”
Doing the same things over and over but expecting different results has been the entrenched characteristic of politics. The essence of politics is symbolism. The impression to “do something” are actually meant to generate votes.
In reality, the purported political path to “police” gives political authorities a share in the the profits. Possibly to finance coming elections?
(bold italics added)
It took the BSP eight long years to realize the might or power of the law of demand on the economy, “if you tax something, you get less of it”!
Such is an example of the complete failure of “statistics is economics”!
Lastly, the political institutions (war on mining) have failed to control or suppress the black market, which has been the primary channel for small-scale mining activities, and subsequently, the conduit for smuggling!
Again in 2012, I wrote: [Philippine Mining Index: Will The Divergences Last? August 13, 2012] (bold italics added)
In reality, environmental preservation and optimizing revenues from the mining industry are strongly associated with theresource curse dilemma, that which is the politicization of the resource industry.
Informal economy, corruption, rent seeking and a general deterioration in the quality of governance are symptoms or are products of asphyxiating regulations, bureaucracy, high burdens from taxes and the cost of compliance, insecure property rights and involuntary exchanges or the intense politicization of the industry.
So the BSP and the political leadership has VALIDATED my predictions!
Well, for the BSP, it may not be all about GIRs or “improving the country’s economic standing and lowering the cost of funding”.
Figure 1, World Gold Council
Global Central Banks buying of gold hit a record high in 1Q 2019.
The central banks of Russia and China helped drive a 7 per cent increase in global gold demand in the first quarter from a year earlier, according to the World Gold Council, as they continued efforts to trim their exposure to US dollars.
Central banks purchased a total of 145.5 tonnes of gold worth about $6bn, an increase of 68 per cent compared with last year and the strongest first quarter since 2013, the industry-led body said.
Russia was the biggest buyer during the period, adding 55.3 tonnes of the yellow metal to tilt the composition of its reserves away from the US dollar, amid rising tensions with Washington and the prospect of further sanctions. China added 33 tonnes to its holdings and Ecuador bought gold for the first time since 2014, said the WGC.
There’s been lots of purchases by emerging market central banks looking to diversify their US dollar exposure, or in the case of Russia there are potential implications for FX reserve management if they become subject to sanction risk,” said Alistair Hewitt, a director at the WGC.
Last year central banks bought more gold than at any time since the end of the gold standard in 1971, led by Russia and Kazakhstan.
Still, the WGC data show that purchases have started to slow from last year. In the third quarter of 2018 central banks bought a total of 253 tonnes of gold, and 165.6 tonnes in the fourth quarter.
Overall gold demand also fell 17 per cent from the fourth quarter of 2018, said the WGC.
The BSP may have been influenced by emerging market central bank trend of partly diversifying its reserves assets.
It could also be about hedging reserves against the risks of a financial calamity.
Figure 2, World Gold Council
It may also be in response to the snowballing geopolitics of de-globalization as evidenced by the increased usage of economic sanctions and trade wars where gold may serve as safe-haven assets for central banks.
It may even be about emerging markets veering away from the US dollar standard to elude the hegemonic grip of US financial institutions and geopolitical intrusions.
It could even be related to financial asset collaterals used in the offshore US dollar (Eurodollar) markets.
Figure 3
So the BSP’s Gold Bill must be about preparations to accumulate gold reserves and or designed to CENTRALIZE domestic gold trade for either tax purposes (formal gold enterprises) or to manage gold flows.
Figure 4 (Gold Price)
Because of the market mayhem late last year, gold prices surged to record highs against 72 currencies in January 2019.
Well, gold prices in Philippine pesos, reveals a similar dynamic as it approaches its 2011 apex.
So has the BSP been anticipating the record gold prices in pesos too for it to push the Gold Bill?
With the BSP’s Gold Bill highlighting the culmination of the absurd war on mining, expect that the next political move on the industry to be about liberalization.
Tax issues will impel the National Government to liberalize the industry.
The alcohol prohibition was repealed by US President Franklin Delano Roosevelt in 1933, hardly because of its social side effects but because the government wanted to generate financing in the face of the great depression.
And a House leader of Congress' successful attempt to propose the Prohibition-ending 21st Amendment said in 1934 that "if (anti-prohibitionists) had not had the opportunity of using that argument, that repeal meant needed revenue for our government, we would not have had repeal for at least 10 years."
There's no doubt that widespread understanding of Prohibition's futility and of its ugly, unintended side-effects made it easier for Congress to repeal the 18th Amendment. But these public sentiments were insufficient, by themselves, to end the war on alcohol.
Ending it required a gargantuan revenue shock -- to the U.S. Treasury.
From this premise, I shall make a prediction.
When the real economy falters, the government will liberalize the mining sector!
(bold original)
The Era of Easy Money is OVER! President Duterte Confirmed This With “The Economy Is In Doldrums” June 24, 2018
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