The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility

 

Devaluing is a de facto default and the manifestation of the insolvency of a nation—Daniel Lacalle 

In this Issue

The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility 

Part I: The USD-Philippine peso Breach at Php59

IA. The Soft Peg’s Strain Finally Shows

IB. "Market Forces" or Managed Retreat?

IC. Gold, GIR, and the Mirage of Strength

ID. Historical Context: Peso Spikes and Economic Stress

Part II: The Savings–Investment Gap (SIG) Illusion

IIA. Savings–Investment Gap—a Flawed Metric and Free Lunch Spending

IIB. Misclassified Investment, ICOR and the Productivity mirage

Part III: Soft Peg Unravels: Systemic Fragility Surfaces, Confidence Breakdown

IIIA. The Keynesian Hangover: How "Spending Drives Growth" Became National Pathology

IIIB. Credit-Fueled Consumption and Fiscal Excess: Twin Deficits

IIIC. CMEPA and the Deepening of Financial Repression: How the State Institutionalized Capital Flight

IIID. Corruption as Symptom, Not Cause: The Flood Control Scandal and Malinvestment Crisis

IIIE. The Soft Peg's Hidden Costs: FX Regime as Subsidy Machine and Flight Accelerant

IIIF. Gold Sales Redux: The 2020–2021 Playbook Returns

IIIG. GIR Theater: Borrowed Reserves and Accounting Opacity, Slowing NFA and Widening BOP Gap

IIIH. Soft Peg Lessons: Where From Here? Historical Patterns and the Road to 62—or 67?

IV. Conclusion: Why This Time May Be Worse, the BSP is Whistling Past the Graveyard 

The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility 

How the BSP’s widening savings–investment gap, soft peg, flood control response left the peso exposed—and what it reveals about the Philippine economy.

Part I: The USD-Philippine peso Breach at Php59 

IA. The Soft Peg’s Strain Finally Shows 

This is what we posted at X.com 

After three years, $USDPHP breaks the BSP’s 59 Maginot line. What cracked it?

• 👉 Record savings–investment gap (BSP easing, deficit spending, CMEPA)
• 👉 BSP soft peg (gold sales)
• 👉 Capital controls fueling flight
• 👉 Weak economy + high debt 

The soft peg’s strain finally shows. 

After three years of tacit defense, the BSP’s 59.00 line cracked on October 28. Yet it closed the week—and the month—at 58.85, just below what we’ve long called the BSP’s ‘Maginot line.’ 

IB. "Market Forces" or Managed Retreat? 

The BSP and media attributed the breach to “market forces.” But if the peso’s rate is truly market-determined, why issue a press release at all? To reassure the public? Why the need for reassurance? And if the breakout were merely “temporary,” why frame it at all—unless the goal is to condition perception before the markets interpret the breach as systemic or draw their own conclusions?

Figure 1

Another dead giveaway lies in the BSP’s phrasing: it “allows the exchange rate to be determined by market forces.” (Figure 1, upper image)

That single word—allows—is revealing. 

It presupposes BSP supremacy over the market, implying that exchange rate movements occur only at the central bank’s discretion. FX determination, in this framing, is not a spontaneous process but a managed performance. Market forces operate only within the parameters permitted by the BSP. “Allowing” or “disallowing” thus reflects not market discipline, but bureaucratic control masquerading as market freedom. 

Yet, the irony is striking: they cite “resilient remittance inflows” as a stabilizer—even as the peso weakens. If OFW remittances, BPO earnings, and tourism inflows are as strong as claimed, what explains the breakdown? 

Beneath the surface, the pressures are unmistakable: thinning FX buffers, rising debt service, and the mounting cost of defending a soft peg that was never officially admitted.

IC. Gold, GIR, and the Mirage of Strength

Then there’s the gold angle. 

In 2024, the BSP was the world’s largest central bank seller of gold—offloading reserves to raise usable dollars. (Figure 1, lower chart)

Figure 2

Now, higher gold prices inflate its GIRs on paper—an accounting comfort masking liquidity strain. It’s the same irony we saw in 2021–22, when the BSP sold gold amid a pandemic recession and the peso still plunged. (Figure 2, upper graph) 

Adding to the drama, the government announced a price freeze on basic goods just a day before the peso broke Php 59. Coincidence—or coordination to suppress the impact? 

And there was no “strong dollar” to blame. The breakout came as ASEAN peers—the Thai baht, Indonesian rupiah, Singapore dollar, and Malaysian ringgit—strengthened. This was a PHP-specific fracture, not a USD-driven move. (Figure 2, lower table) 

ID. Historical Context: Peso Spikes and Economic Stress

Figure 3

Historically, sharp spikes in USDPHP have coincided with economic strain:

• 1983 debt restructuring
• 1997 Asian Financial Crisis
• 2000 dotcom bubble bust
• 2008–2010 Global Financial Crisis
• 2020 pandemic recession (Figure 3, upper window)

The BSP even admitted “potential moderation in economic growth due in part to the infra spending controversy” for this historic event. That makes reassurance an even more potent motive. 

Remember: USDPHP made seven attempts to breach 59.00—four in October 2022 (3, 10, 13, 17), three from November 21 and 26 to December 19, 2024. That ceiling revealed the BSP’s implicit soft peg. The communique doesn’t explain why the eighth breach succeeded—except to say it was “market determined.” But that’s just another way of saying the market has abandoned the illusion of BSP control. (Figure 3, lower diagram)

As I’ve discussed in earlier Substack notes, this moment was years in the making: 

• The widening savings–investment gap
• CMEPA’s distortions
• Asset bubbles, the creeping financial repression and fiscal extraction that eroded domestic liquidity 

The peso’s breach of 59 isn’t just a technical move. It’s the culmination of structural stress that monetary theater can no longer hide. 

Part II: The Savings–Investment Gap (SIG) Illusion

IIA. Savings–Investment Gap—a Flawed Metric and Free Lunch Spending 

Spending drives the economy.  That ideology underpins Philippine economic policy—from the BSP’s inflation targeting and deficit spending to its regulatory, tax, and FX regimes—and it has culminated in a record savings–investment (SIG) gap. 

This is the Keynesian hangover institutionalized in Philippine policy—confusing short-term demand management with sustainable capital formation 

But this is not merely technocratic doctrine; the obsession with spending anchors the free-lunch politics of ochlocratic social democracy. 

Yet even the SIG is a flawed metric. 

As previously discussed, “savings” in national accounts is a residual GDP-derived figure riddled with distortions, not an empirical aggregation of household or corporate saving. It even counts government savings—retained surpluses and depreciation allowances—when, in truth, fiscal deficits represent outright dissaving. (see reference) 

Worse, the inclusion of non-cash items such as depreciation and retained earnings inflates measured savings, masking the erosion of actual household liquidity.

IIB. Misclassified Investment, ICOR and the Productivity mirage 

Even the “investment” side is overstated. Much of it is public consumption misclassified as capital formation. Because politics—not markets—dictate pricing and returns, the viability of monopolistic political projects cannot be credibly established. 

Consider infrastructure. Despite record outlays, the Incremental Capital-Output Ratio (ICOR) has worsened—proof that spending does not equal productivity.

Figure 4

According to BSP estimates, the Philippines’ ICOR has fallen from around 8.3 in the 1989-92 period to approximately 4.1 in 2017-19, contracted by 12.7% and recovered to around 3.0 by 2022 (see reference) (Figure 4, topmost visual) 

While the ICOR trend suggests some efficiency gains since the 1990s, it remains a blunt and often misleading proxy—distorted by GDP rebasing, project misclassification, and delayed returns. What it does reveal, however, is the widening gap between spending and sustainable productivity 

Listed PPP firms, meanwhile, sustain appearances through leverage, regulatory capture and forbearance, and mark-to-model accounting. The result is concealed fragility, reinforced by the hidden costs of various acts of malfeasance, conveniently euphemized as by the public as “corruption.” 

In the end, the SIG tells a simple truth: domestic savings are too scarce to fund both public and private investment. The gap is bridged by FX borrowing. 

But this is not a sign of strength—it’s a symptom of deepening structural dependence, masked by monetary theater and fiscal illusion, thus amplifying peso vulnerability. Every fiscal impulse now imports external leverage, entrenching the illusion of growth at the expense of stability. 

Part III: Soft Peg Unravels: Systemic Fragility Surfaces, Confidence Breakdown 

IIIA. The Keynesian Hangover: How "Spending Drives Growth" Became National Pathology 

Spending-as-growth isn’t just policy—it’s pathology.

While the BSP’s mandate is "to promote price stability conducive to balanced and sustainable growth," its inflation-targeting framework—tilted toward persistent monetary easing—has effectively become a GDP-boosting machine to finance free-lunch political projects. 

Banks have realigned their balance sheets accordingly. Consumer loans by universal and commercial banks rose from 8.2% of total lending in December 2018 to 13.5% in August 2025—a 64% surge—while the share of industry loans declined from 91.7% to 86.5% over the same period. (Figure 4, middle pane) 

Fueled by interest rate subsidies and real income erosion, households are leveraging aggressively to sustain consumption. Yet as GDP growth slows, the marginal productivity of credit collapses—meaning every new peso of debt generates less output and more fragility for both banks and borrowers. 

Production credit’s stagnation also forces greater import dependence to meet domestic demand.

IIIB. Credit-Fueled Consumption and Fiscal Excess: Twin Deficits 

Meanwhile, deficit spending—now nearing 2021 pandemic levels—artificially props up consumption at the expense of productivity gains. (See reference for last week’s Substack.) 

Together, credit-fueled consumption and fiscal excess have produced record "twin deficits." (Figure 4, lowest chart) 

The fiscal deficit widened from Php 319.5 billion in Q2 to Php 351.8 billion in Q3, while the trade deficit expanded from USD 12.0 billion to USD 12.76 billion—levels last seen in 2020. 

Historically, fiscal deficits lead trade gaps—it raises import demand. If the budget shortfall hits fresh records by year-end, the external imbalance will likely push the trade deficit back to its 2022 peak.

Figure 5

These deficits are not funded by real savings but by credit—domestic and external. The apparent slowdown in approved public foreign borrowings in Q3 likely masks rescheduling (with Q4 FX borrowings set to spike?), delayed recognition, shift to BSP-led financing (to reduce scrutiny) or accounting prestidigitation (Figure 5, topmost diagram) 

Public external debt accounted for roughly 60% of the record USD 148.87 billion in Q2. Even if Q3 slows, the trajectory remains upward. (Figure 5, middle graph) 

In short, widening twin deficits mean more—not less—debt. 

Slowing consumer sales growth, coupled with rising real estate vacancies, signals that private consumption is already being crowded out—a deepening symptom of structural strain in the economy.

IIIC. CMEPA and the Deepening of Financial Repression: How the State Institutionalized Capital Flight

Yet the newly enacted CMEPA (Capital Market Efficiency Promotion Act, R.A. 12214) deepens the financial repression: it taxes savings, institutionalizes these by redirecting or diverting household savings into state-controlled channels or equity speculation, and discriminates against private-sector financing. By weakening the deposit base, it also amplifies systemic fragility. The doubling of deposit insurance last March, following RRR cuts, appears preemptive—an implicit admission of the risk CMEPA introduces. 

Authorities embraced a false choice. Savers are not confined to pesos—they can shift to dollars or move capital abroad entirely. Capital flight is not theoretical; for the monied class, it can be a reflexive response. 

IIID. Corruption as Symptom, Not Cause: The Flood Control Scandal and Malinvestment Crisis 

The recent “flood control” corruption scandal has merely exposed the deeper rot. 

Consensus recently blames the peso’s fall and stock market weakness on “exposed corruption.” But this is post hoc reasoning: both the peso and PSEi 30 peaked in May 2025—months before the scandal broke. (Figure 5, lowest image)

Corruption, as argued last week, is not an aberration—it’s embedded or a natural expression of free-lunch social democracy 

It begins at the ballot box and metastasizes through centralization, cheap money, financial repression, the gaming of the system and rent-seeking. It explains the entrenchment of political dynasties and the extraction economy they operate on. 

What media and the pundits call “corruption” is merely the visible tip. The deeper pathology is malinvestment—surfacing across: 

• Bank liquidity strains
• Wile E. Coyote NPLs
• Record real estate vacancies
• Slowing consumer spending despite record debt
• Cracks in employment data
• Persistently elevated self-rated poverty ratings (50% + 12% borderline as of September).
• Stubborn price pressures and more… 

The BSP’s populist response to visible corruption? 

Capital controls, withdrawal caps, probes, and virtue signaling. These have worsened the erosion of confidence, potentially accelerating the flight to foreign currency—and escalating malinvestments in the process. (see reference) 

What emerges is not just structural decay, but a slow-motion confidence collapse. 

IIIE. The Soft Peg's Hidden Costs: FX Regime as Subsidy Machine and Flight Accelerant 

And there is more. The BSP also operates a de facto FX soft-peg regime. 

By keeping a lid on its tacit thrust to devalue, its implicit goal is not merely to project macro stability, but to subsidize the USD and manage the CPI within its target band. Unfortunately, this policy overvalues the peso, encouraging USD-denominated borrowing and external savings while providing the behavioral incentive for capital flight.

Figure 6

Including public borrowing, the weak peso has prompted intensified growth in the banking system’s FX deposits. In August 2025, FX deposits rose 11.96%—the second straight month above 10%—reaching 15.07% of total bank liabilities, the highest since November 2017. (Figure 6, topmost window) 

The BSP’s FX regime also includes its reserves management—Gross International Reserves (GIR).

IIIF. Gold Sales Redux: The 2020–2021 Playbook Returns 

As noted above, similar to 2020–2021, the BSP embarked on massive gold sales to defend the USDPHP soft peg. Yet the peso still soared 22.97% from 47.90 in May 2021 to 58.9 in September 2022. That pandemic-era devaluation coincided with a CPI spike—peaking at 8.7% in January 2023. The 2024 gold sales echo this pattern, offering a blueprint for where USDPHP could be heading. 

The BSP insists that benchmarks like the GIR assure the public of sufficient reserves. Yet it has never disclosed the composition in detail. Gold—which the BSP remains averse to—accounts for only ~15% of the GIR (September). A former BSP governor even advocates selling gold "to profit” from it." (2020 gold sales and devaluation occurred in his tenure) 

But since the BSP doesn’t operate for profit-and-loss, but for political objectives such as "price stability," this logic misrepresents intent.

IIIG. GIR Theater: Borrowed Reserves and Accounting Opacity, Slowing NFA and Widening BOP Gap 

A significant portion of GIR—around 5%—consists of repos, derivatives, and other short-term instruments classified as Other Reserve Assets (ORA), introduced during the 2018 peso appreciation. Not only that: national government borrowings deposited with the BSP are also counted as GIR. Hence, “borrowed reserves” make up a substantial share. (Figure 6, middle graph) 

If reserves are truly as strong as officially claimed, why the peso breakout—and the need for a press release? 

All this is reflected in the stagnating growth of BSP net foreign assets (NFA) since 2025, reinforcing a downtrend that began in 2013. While nominally at Php 6.355 trillion, NFA is down 2.1% from the record Php 6.398 trillion in November 2024. (Figure 6, lowest diagram)

Figure 7

This fragility is also evident in the balance of payments (BOP) gap. Though narrowing in recent months, it reached USD 5.315 billion year-to-date—its highest since the post-pandemic recession of 2022. That’s 67% of the November 2022 peak. (Figure 7, topmost graph) 

The apparent improvement merely reflects deferred pressure—delayed borrowings and import compression. 

Despite BSP claims, net outflows reflect more than trade gaps. They signal external debt servicing amid rising leverage, capital flight, and systemic strain.

IIIH. Soft Peg Lessons: Where From Here? Historical Patterns and the Road to 62—or 67? 

Last March, we wrote: 

The USDPHP exchange rate operates under a ‘soft peg’ regime, meaning the BSP will likely determine the next upper band or ceiling. In the previous adjustment, the ceiling rose from 56.48 in 2004 to 59 in 2022, representing a 4.5% increase. If history rhymes, the next likely cap could be in the 61–62 range. (see reference) 

At the time, our lens was historical—measuring breakout levels from 2004 to 2022 and projecting forward to 2025. 

But as noted above, USDPHP spikes rarely occur in a vacuum. They tend to coincide with economic stress. Using BSP’s end-of-quarter data, we find: (Figure 7, middle table) 

• 1983 debt restructuring: +121% over 12 quarters (Q1 1982–Q1 1985)
• 1997 Asian Financial Crisis: +66.15% over 6 quarters (Q1 1997–Q3 1998)
• 1999–2004 dotcom bust: +30.6% over 20 quarters (Q2 1999–Q1 2004)
• 2007–2009 Global Financial Crisis: +16.95% over 5 quarters (Q4 2007–Q1 2009)
• 2020–2022 pandemic recession: +22.64% over 7 quarters (Q4 2020–Q3 2022) 

While the USDPHP also rose from 2013–2018, this episode was largely driven by the Fed’s Taper Tantrum, China’s 2015 devaluation, and Trump-era fiscal stimulus—with no comparable economic event.

IV. Conclusion: Why This Time May Be Worse, the BSP is Whistling Past the Graveyard 

The current moment is different. 

Using the post-2022 low—Q2 2025 at 56.581—as a base, a 10% devaluation implies a target of 62.24. But with the late-cycle unraveling, a weakening domestic economy, and rising debt burdens, the odds tilt towards a deepening of stagflation—or worse. If the peso mirrors its pandemic-era response, a 20% devaluation to 67.90 is not far-fetched. 

Even the BSP now concedes "potential moderation in economic growth." 

Yet it continues to cite “resilient inflows” like tourism. The Department of Tourism data tells another story: as of September 2025, foreign arrivals were down 3.5% year-on-year—hardly a sign of strength. (Figure 7, lowest chart) 

Otto von Bismarck’s maxim applies: 

Never believe anything in politics until it has been officially denied. 

Hounded by diminishing returns and Goodhart’s Law—where every target becomes a distortion—the BSP clings to benchmarks that no longer signal strength. From the USDPHP to GIR composition, Net Foreign Assets, and FX deposit ratios, the metrics have become theater. The more they’re defended, the less they reflect reality.

In the face of unraveling malinvestments, deepening institutional opacity, and accelerating behavioral flight, the BSP is whistling past the graveyard. 

Caveat emptor. The illusion is priced in.  

____ 

References 

Bangko Sentral ng Pilipinas, Discussion Paper Series No. 2024-10: Estimating the Incremental Capital Output Ratio (ICOR) for the Philippines, Towards Greater Efficiency: Estimating the Philippines’ Total Factor Productivity Growth and its Determinants BSP Research Academy, June 2024. 

Prudent Investor Newsletters: 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025 

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design, Substack, July 27, 2025 

The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025 

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay, Substack, October 26, 2025 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate? Substack, March 03, 2025 

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate, Substack, January 02, 2025 

June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 03, 2025

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series)

 

In the course of history various commodities have been employed as media of exchange. A long evolution eliminated the greater part of these commodities from the monetary function. Only two, the precious metals gold and silver, remained. In the second part of the 19th century, more and more governments deliberately turned toward the demonetization of silver. In all these cases what is employed as money is a commodity which is used also for nonmonetary purposes. Under the gold standard, gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government—Ludwig von Mises 

This post is the second in a three-part series 

In this Issue 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order?

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise

II. A Brief Recap on Gold’s Role as Money

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard)

IV. The Age of Fiat Money and the Explosion of Debt

V. Central Banks: The Marginal Price Setters of Gold

VI. Is a U.S. Gold Audit Fueling Record Prices? 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? 

The second part of our series examines the foundation of the global economy—the 54-year-old U.S. dollar standard—and its deep connection to gold’s historic rally. 

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise 

Global central banks have played a pivotal role in driving gold’s record-breaking rise, reflecting deeper tensions in the global financial system. 

Since the Great Financial Crisis (GFC) of 2008, central banks—predominantly those in emerging markets—have significantly increased their gold reserves, pushing levels back to those last seen in 1975, a period just after the U.S. government severed the dollar’s link to gold on August 15, 1971, in what became known as the Nixon Shock. 

This milestone reminds us that the U.S. dollar standard, backed by the Federal Reserve, will mark its 54th anniversary by August 2025.

Figure 1

The accumulation of gold by central banks, particularly in the BRICS nations, reflects a strategic move to diversify away from dollar-dominated reserves, a trend that has intensified amid trade wars, sanctions, and the weaponization of finance, as seen in the freezing of Russian assets following the 2022 Ukraine invasion.  (Figure 1, upper window)

The fact that emerging markets, particularly members of the BRICS bloc, have led this accumulation—India, China, and war-weary Russia have notably increased their gold reserves, though they still lag behind advanced economies—reveals a growing fracture in the relationship between emerging and advanced economies.  (Figure 1, lower graph and Figure 2, upper image)  

Figure 2

Additionally, their significant underweighting in gold reserves suggests that BRIC and other emerging market central banks may be in the early stages of a structural shift. If their goal is to reduce reliance on the U.S. dollar and close the gap with advanced economies, the pace and scale of their gold accumulation could accelerate (Figure 2, lower chart)

Figure 3

As evidence, China’s central bank, the People’s Bank of China (PBOC), continued its gold stockpiling for a fourth consecutive month in February 2025. (Figure 3, upper diagram)

Furthermore, last February, the Chinese government encouraged domestic insurance companies to invest in gold, signaling a broader commitment to gold as a financial hedge. 

This divergence underscores a deepening skepticism toward the U.S.-led financial system, as emerging markets seek to hedge against geopolitical and economic uncertainties by strengthening their gold reserves 

In essence, gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, fissures that are being expressed through escalating geopolitical and geoeconomic stress. 

II. A Brief Recap on Gold’s Role as Money 

To understand gold’s evolving role, a brief historical summary is necessary. 

Alongside silver, gold has spontaneously emerged and functioned as money for thousands of years. Its finest moment as a monetary standard came during the classical gold standard (1815–1914), a decentralized, laissez-faire regime in Europe that facilitated global trade and economic stability. 

As the great dean of the Austrian School of Economics, Murray Rothbard, explained, "It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government." (Rothbard, 1963) 

However, this system was not destined to endure. The rise of the welfare and warfare state, supported by the emergence of central banks, led to the abandonment of the classical gold standard. 

As Mises Institute’s Ryan McMaken elaborated, "This system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: ‘[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.’" (McMaken, March 2025) 

The uniformity, homogeneity, and growing dependency on the state in managing monetary affairs ultimately contributed to the classical gold standard’s demise. 

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard) 

World War I forced governments to abandon gold convertibility, leading to the adoption of the Gold Exchange Standard—where only a select few currencies, such as the British pound (until 1931) and the U.S. dollar (until 1933), remained convertible into gold. 

Later, the Bretton Woods System attempted to reinstate a form of gold backing by pegging global currencies to the U.S. dollar, which in turn was tied to gold at $35 per ounce. 

However, rising U.S. inflation, fueled by fiscal spending on the Vietnam War and social welfare programs, combined with the Triffin dilemma, led to a widening Balance of Payments (BoP) deficit. Foreign-held U.S. dollars exceeded U.S. gold reserves, threatening the system’s stability. 

As economic historian Michael Bordo explained: "Robert Triffin (1960) captured the problems in his famous dilemma. Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade. The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world’s monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin, when the tipping point occurred, the US monetary authorities would tighten monetary policy, leading to global deflationary pressure." (Bordo, 2017)

Bretton Woods required a permanently loose monetary policy, which ultimately led to a mismatch between U.S. gold reserves and foreign held dollar liabilities. 

To prevent a run on U.S. gold reserves, President Richard Nixon formally ended the dollar’s convertibility into gold on August 15, 1971, ushering in a fiat money system based on floating exchange rates anchored to the U.S. dollar. 

IV. The Age of Fiat Money and the Explosion of Debt 

With the shackles of gold removed, central banks gained full control over monetary policy, leading to unprecedented levels of inflation and political spending. Governments expanded their fiscal policies to fund not only the Welfare and Warfare State, but also the Administrative/Bureaucratic State, Surveillance State, National Security State, Deep State, Wall Street Crony State, and more. 

The most obvious consequence of this system has been the historic explosion of global debt. The OECD has warned that government and bond market debt levels are at record highs, posing a serious threat to economic stability. (Figure 3, lower chart) 

V. Central Banks: The Marginal Price Setters of Gold 

Ironically, in this 54-year-old fiat system, so far, it is politically driven, non-profit central banks—rather than market forces—that have become the marginal price setters for gold. 

Unlike traditional investors, central banks DON’T buy gold for profit, but for political and economic security reasons. 

The World Gold Council’s 2024 survey provides insight into why central banks continue to accumulate gold: "The survey also highlights the top reasons for central banks to hold gold, among which safety seems to be a primary motivation. Respondents indicated that its role as a long-term store of value/inflation hedge, performance during times of crisis, effectiveness as a portfolio diversifier, and lack of default risk remain key to gold’s allure." (WGC, 2024) 

This strategic accumulation reflects a broader trend of central banks seeking to insulate their economies from the vulnerabilities of the fiat system, particularly in an era of heightened geopolitical risks and dollar weaponization.

Figure 4 

The Bangko Sentral ng Pilipinas (BSP) has historically shared this view. (Figure 4, upper graph) 

In a 2008 London Bullion Management Association (LBMA) paper, a BSP representative outlined gold’s importance in Philippine foreign reserves—a stance that remains reflected in BSP infographics today. 

Alas, in 2024, following criticism for being the largest central bank gold seller, BSP reversed its stance. Once describing gold reserves as "insurance and safety," it now dismisses gold as a "dead asset"—stating that: "Gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." 

This shift in narrative conveniently justified BSP’s recent gold liquidations. 

Yet, as previously noted, history suggests that BSP gold sales often precede peso devaluations—a warning sign for the Philippine currency. (Figure 4, lower window)

VI. Is the Propose U.S. Gold Audit Help Fueling Record Prices? 

Finally, could the Trump-Musk push to audit U.S. gold reserves at Fort Knox be another factor behind gold’s rally? 

There has long been speculation that U.S. Treasury gold reserves, potentially including gold stored for foreign nations, have been leased out to suppress prices.

Figure 5

Notably, Comex gold and silver holdings have spiked since these audit discussions began. Gold lease rates rocketed to the highest level in decades last January. (Figure 5, top and bottom charts) 

With geopolitical uncertainty rising, central bank gold buying accelerating, and doubts growing over fiat stability, gold’s record-breaking ascent may be far from over. 

Yet, it’s important to remember that no trend goes in a straight line.

___

References 

Murray N. Rothbard, 1. Phase I: The Classical Gold Standard, 1815-1914, What Has Government Done to Our Money? Mises.org 

Ryan McMaken, The Rise of the State and the End of Private Money March 25,2025, Mises.org 

Michael Bordo The operation and demise of the Bretton Woods system: 1958 to 1971 CEPR, Vox EU, April 23, 2017 cepr.org 

World Gold Council, Gold Demand Trends Q2 2024, July 30,2024, gold.org

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate?

 

Central banks and finance ministries do not hold copper, aluminum, or steel supplies, yet they hold gold. The only explanation for central bank gold hoards is the obvious one - gold is money― James Rickards

In this issue 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate?

I. BSP’s Contradicting Official Statements

II. Why the Rhetorical Shift? World’s Largest Gold Seller in 2024—BSP

III. BSP’s Gold Sales: Supporting the USD-PHP Soft Peg

IV. Other Reserve Assets (ORA) and Financial Derivatives: Did the BSP Short Gold?

V. Broader Economic Pressures: 11-Year High January Balance of Payments (BoP) Deficit and Soaring External Debt

VI. Signaling Channel: The BSP’s Softening Rhetorical Stance on the USDPHP Cap

VII. Conclusion: Inevitable Devaluation of the Philippine Peso? 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate? 

The BSP’s gold reserves have been shrinking since 2020, ultimately contributing to the devaluation of the Philippine peso. The BSP sold the most gold in 2024—how low will the peso fall? 

I. BSP’s Contradicting Official Statements 

So, the BSP’s caught up in the wild storm of election season, and guess what? They’re back at it, defending their whole deal with gold reserves. 

BSP, February 24: "The country’s GIR is not used for any other purpose other than meeting the country’s forex requirements. Tasked to manage the country’s external accounts, among other functions, the BSP has been buying and selling gold over the years as part of its core functions. When the BSP sells gold, the proceeds revert to and stay within the GIR. Last year, the GIR rose to USD 106.3 billion from USD 103.8 billion in 2023. Similar to other central banks, the BSP maintains a portion of its reserves in gold as part of the country’s GIR mostly to hedge against/offset movements in the market price of other assets. It buys or sells gold to maintain an optimum level for this purpose, not too much, not too little. This follows basic portfolio-management principles. Gold prices tend to move in the opposite direction of other assets. Therefore central banks hold some gold as a hedge against price declines in other assets in the reserves. However gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." (bold added) 

Back in September, after basking in the limelight, the BSP defended its decision to sell gold.

BSP, September 24, 2024: "The Bangko Sentral ng Pilipinas (BSP) sold gold during the first half of the year as part of its active management strategy of the country’s gold reserves, which form part of the country’s Gross International Reserves (GIR). The BSP took advantage of the higher prices of gold in the market and generated additional income without compromising the primary objectives for holding gold, which are insurance and safety." (bold added) 

There is a stark shift in the BSP’s stance on gold reserves. Earlier, they described gold as essential for "insurance and safety," yet last month they’ve characterized it as a "dead asset" that "earns little interest and has storage costs." 

II. Why the Rhetorical Shift? World’s Largest Gold Seller in 2024—BSP

Figure 1

The World Gold Council (WGC) noted that the BSP "confirmed its gold sales—totaling 30 tonnes"—the largest sale by a central bank in 2024. (Figure 1, upper image)

While some other central banks also sold gold, their sales were on a significantly smaller scale.

Globally, central banks were net buyers in 2024, particularly emerging market central banks. The WGC reported that "Central banks added 1,045 tonnes to global gold reserves in 2024."

Since the 2008 financial crisis, global central banks have been rebuilding reserves. (Figure 1, lower pane)

Figure 2

Notably, China’s PBOC and the Central Bank of India were among the most aggressive buyers—not just in 2024, but for several years. (Figure 2, upper window)

Alongside Russia, their gold holdings have matched or even exceeded those of some developed nations, closing the gap with the US. (Figure 2, lower chart—excludes unpublished holdings)

Given this trend, BSP’s claim that "central banks don’t want to hold too much" appears misleading—an appeal to the false majority (argumentum ad populum).

It seems more like an attempt to justify its selling spree rather than reflect actual central bank behavior globally.

III. BSP’s Gold Sales: Supporting the USD-PHP Soft Peg

As part of its "active management strategy," the BSP has been selling gold to finance the USD-PHP soft peg, capping the exchange rate at 59 per USD. This is not just about portfolio rebalancing—it’s a deliberate move to influence the USDPHP exchange rate. 

But that’s not the whole story.

There are costs to this approach. Central banks are political institutions and are not driven by profit-and-loss activities. When the BSP came under scrutiny for its aggressive selling, not only did they stop, but they also started repurchasing gold in August—at much higher prices. In essence, they sold high but bought higher, leading to opportunity losses.

Figure 3

Despite recent incremental purchases, BSP’s gold reserves remain at their lowest level since at least 2019, according to BSP and IMF’s data template on International Reserves and Foreign Currency Liquidity (IRIFCL) data. 

Data further highlights historical trends, including BSP’s two waves of gold sales. (Figure 3, topmost graph) 

First Wave (2020-2021 Pandemic Recession): BSP sold gold even as the USD-PHP was weakening. This suggests it anticipated the pesos’ depreciation. 

Second Wave (Nov 2023 - July 2024): Gold sales preceded another test of the USD-PHP 59 level in June 2024, implying an effort to manage exchange rate volatility. 

Despite record-high gold prices, BSP’s overall reserves increased due to valuation gains rather than inventory growth. (Figure 3, middle diagram) 

In any case, the all-time high in gold prices has led to an increase in gold’s share of the GIR, reaching 2020 levels. (Figure 3, lowest image) 

On the other hand, the BSP’s demonstrated preference for gold sales reveals its dogmatic proclivities, which barely acknowledges gold as a function of ‘insurance and safety.’ 

Still, despite a reduction in inventory, the BSP owes a significant share of its GIR to gold prices. 

IV. Other Reserve Assets (ORA) and Financial Derivatives: Did the BSP Short Gold? 

Figure 4

Beyond public external borrowings, (Figure 4, topmost graph) which bolster the GIR through National Government deposits with the BSP, Other Reserve Assets (ORA) have played a prominent role since 2018. 

ORA has been rising since January 2024, when the BSP accelerated its gold sales. (Figure 4, middle window) 

ORA has played a conspicuous role in the USDPHP. Its surge from 2018 to 2020 coincided with the fall of the USDPHP, and vice versa (Figure 4, lowest chart) 

ORA includes: 

-Mark-to-market financial derivatives (forwards, futures, swaps, options)

-Forwards and options on gold

-Short-term foreign currency loans

-Other financial assets used for immediate liquidity

-Repo assets 

This raises key questions: 

-Has BSP been ‘shorting’ gold via ORA while conducting physical sales to settle delivery? 

-Is BSP boosting its reserves with derivatives and repos via transactions with international financial intermediaries, particularly US-based institutions? 

While the BSP claims that gold "earns little interest and has storage costs," financial derivatives also incur commissions and fees, which are paid to banks, brokers, and dealers. These costs include premiums on options and other transaction fees. 

-Why has the BSP been prioritizing financial derivatives and repos over gold, which serves as "insurance and safety"? Are these instruments not costlier and riskier? 

-Has geopolitics influenced the BSP’s decision-making trade-offs? Aside from its geopolitical alignment with the U.S., could this shift toward Wall Street-linked instruments be connected to the Philippines' removal from the FATF’s money laundering grey list? 

To sum up, has the BSP’s increasing use of financial leverage to sustain the USDPHP soft peg led to diminishing returns? And is its shrinking gold stock a symptom of this trend? 

V. Broader Economic Pressures: 11-Year High January Balance of Payments (BoP) Deficit and Soaring External Debt 

Yet more symptoms. 

BSP, February 19: "The country’s overall balance of payments (BOP) position posted a deficit of US$4.1 billion in January 2025, higher than the US$740 million BOP deficit recorded in January 2024. The BOP deficit in January 2025 reflected the Bangko Sentral ng Pilipinas’ (BSP) net foreign exchange operations and drawdowns by the national government (NG) on its foreign currency deposits with the BSP to meet its external debt obligations."

Figure 5

That is, the January BoP deficit widened to an 11-year high! Ironically, the NG raised USD 3.3 billion in January. This suggests that the BOP deficit largely reflects the net cost of defending the USDPHP soft peg. Remarkable!

Additionally, Bureau of Treasury data shows that external debt in peso terms—partially reflecting devaluation—continues to surge, growing 11.4% year-over-year, with its uptrend dating back to 2012

FX debt servicing costs (interest and amortization) skyrocketed 47.5% in 2024, increasing its share of total debt to 22.9%, confirming a trend reversal in 2023.

Be reminded: This debt buildup wouldn’t have been necessary had there been sufficient organic FX revenue (e.g., remittances, tourism, service exports, FDI and etc.).

VI. Signaling Channel: The BSP’s Softening Rhetorical Stance on the USDPHP Cap

With declining gold reserves and mounting external pressures, peso devaluation appears increasingly likely.

Inquirer.net, February 15: "A peso fall to the 60-level against the US dollar remains “a possibility” despite the Bangko Sentral ng Pilipinas’ (BSP) decision to hold rates steady, Governor Eli Remolona Jr. said, adding that hitting the pause button on easing was the “less disruptive” action for the market." (bold added)

This media communication represents the "signaling channel" approach—where central bankers use public messaging to condition market expectations.

Foreign institutions have begun forecasting a breach of the 59-peso level:

Sunlife: 61

Bank of America: 60

Maybank: 63

BMI: Above 60

HSBC: Beyond 59 

These are hardly typical forecasts or implicit pressure on the BSP; rather, they seem part of the signaling effort in shaping the Overton Window. 

The USDPHP exchange rate operates under a ‘soft peg’ regime, meaning the BSP will likely determine the next upper band or ceiling. In the previous adjustment, the ceiling rose from 56.48 in 2004 to 59 in 2022, representing a 4.5% increase. If history rhymes, the next likely cap could be in the 61-62 range. 

VII. Conclusion: Inevitable Devaluation of the Philippine Peso? 

BSP’s evolving stance on gold raises fundamental questions about its broader strategy. Its aggressive sales, followed by reactive repurchases at higher prices, suggest a focus on short-term currency stabilization—driven by sensationalist politics—rather than strategic reserve management. 

At the same time, the increasing reliance on derivatives and external debt amplifies long-term financial risks. 

Moreover, the BSP appears less committed to defending the 59 level, as indicated by both its rhetoric and evolving fundamentals, including declining gold reserves. 

With external pressures mounting, peso devaluation seems not a matter of IF but WHEN.