Bangko Sentral ng Pilipinas Governor Benjamin Diokno said over the weekend the regulator will actively engage in gold trading to seize the opportunity presented by the increasing price of the precious metal in the global market.
Diokno said in a statement the shift to active gold trading—from passive trading previously done before he became BSP governor—would be good to manage the rising international reserves.
“Before, the price of gold was in the neighborhood of $1,400/FTO [fine troy ounces]; now, it’s around $2,000/FTO. Second, a new law makes BSP gold purchases from small miners more attractive,” Diokno said in a message to reporters.
He said the third reason is that the gross international reserves climbed to about $100 billion, the highest on record.
“MB [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. A World Bank survey showed that the average allocation of gold relative to reserves should be around 9.55 percent,” he said.
Diokno cited a World Gold Council report showing that a portfolio with 10-percent allocation to gold had a higher risk-adjusted return compared to 0-percent or 5-percent allocation.
“At the moment, the ratio of gold to GIR exceeds 10 percent. BSP will always be opportunistic in its reserves management,” Diokno said.
The country’s GIR level hit $98.6 billion as of end-July 2020. At this level, the GIR represents an ample external liquidity buffer, which can cushion the domestic economy against external shocks.
This is also equivalent to 8.9 months’ worth of imports of goods and payments of services and primary income. Moreover, it is also about 7.6 times the country’s short-term external debt based on original maturity and 4.9 times based on residual maturity.
President Rodrigo Duterte signed last year Republic Act No. 11256 or “An Act to Strengthen the Country’s Gross International Reserves”.
The 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.
RA 11256 seeks to remedy the 99-percent drop in BSP’s domestic gold purchases from more than 900,000 fine troy ounces in 2010 to around 10,000 FTO in 2019 as a result of the taxation on the sale of gold to the BSP beginning July 2011.
The tax regime under RA 11256 would allow the BSP to increase purchases of domestic gold to build up the level of the Philippines’ reserves that serve as the country’s buffer against external shocks.