Gold Pushes BSP’s GIRs to Fresh Highs

The business of central banks is like pornography: In essence, it’s just entertainment and it doesn’t have any real effects—Eugene Fama 

Gold Pushes BSP’s GIRs to Fresh Highs 

As part of its propaganda to portray the Philippines a haven of stability, the BSP delightfully declared that its Gross International Reserves (GIR) hit an all-time high of USD 98 billion last July. 

From a month-on-month basis, only the BSP’s gold holdings recorded substantial gains. 

As proof, the GIR’s gold holdings jumped 57.12% or USD 4.58 billion, which was more than the USD 4.53 billion increase of the total. 

According to the BSP, The month-on-month increase in the GIR level reflected inflows mainly from the revaluation gains from the BSP’s gold holdings 

Simply put, the BSP changed its accounting treatment of gold.  

It revalued its gold holdings by adjusting to reflect on the recent changes in the USD gold prices. Since gold prices had been surging, adjusting for current market prices suddenly ballooned its GIRs.  

 

The BSP holdings of gold reached a record USD 12.6 billion in July. The share of gold relative to the GIR at 12.85%, reached its highest level since 2012. Gold has now become a vital component. 

Gold’s July gains accounted for about 20% of the increase of the GIR from its trough in October 2018 at USD 74.7 billion to July 2020. 

Yet three factors to consider. 

One. If the BSP has indeed been awash with USDs, why the need to revalue gold?

Sure, gold’s recent increases would bolster the GIR, but what happens when the tide reverses like in 2012? Will the BSP freeze the value of their gold holdings as they had from 2013 to June 2020? 

 

Also, is the BSP positioning to use gold as a substitute for derivatives such as FX swaps? 

Reserves are not a free pass for malinvestments from easy money policies. FX reserves are symptoms of the inflationism of the USD standard manifesting the Triffin Dilemma.  

Two. Remember the BSP’s gold bill, which was signed into law by the President last year, exempting small scale miners from excise and income taxes?  This legislation was intended to curb the informal gold trade by incentivizing the SMEs to use the government’s platform. 

Now with the amplification of gold’s role, the BSP may likely be increasing its purchases from the mining industry, in particular, the SMEs, to help shore up its reserves. 

Three. With fiscal deficits reaching unprecedented levels, the National Government and the BSP may accelerate its gold trade to help finance these.  

As such, gold mining activities will likely be encouraged. 

As pointed two years ago…  

5) The last option would be for the NG and BSP to manipulate markets and statistics in the hope that the markets will conform and comply with their political targets. 

 [See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt! May 6, 2018]