Monday, November 28, 2011

EU - The Giovannini Group

The Giovannini Group is a group of financial market experts, under the chairmanship of Alberto Giovannini, CEO of Unifortune Asset Management SGR. The group advises the European Commission on financial market issues. Formed in 1996, it has focused its work on identifying inefficiencies in EU financial markets and proposing practical solutions to improve market integration.


First Giovannini report

Second Giovannini report

EU - One currency for one Europe: The road to the euro

"2007 marks the 50-year anniversary of the Treaty of Rome, a historic undertaking which drew a veil over centuries of conflict and set Europe on an unprecedented path of cooperation and integration. The original signatories have been joined by new participants along the way, giving rise to a community of diverse nations, united around the common values of freedom, democracy, the rule of law, respect for human rights, and equality.
The euro, enshrined as a goal in the Maastricht Treaty in 1992, born as a virtual currency in 1999 and first appearing as cash in people’s pockets in 2002, is an important and tangible manifestation of this community of values.
Of course, the euro is not the currency of all European Union member countries: many of the newer EU members are still working towards meeting the conditions required to adopt the single currency while the UK and Denmark have negotiated opt-outs from the obligation to join.
But, while our economic and monetary union (EMU) is clearly still evolving, the scale of the achievement and its positive impact on the lives of Europeans remain considerable. The euro area’s 13 member countries and more than 315 million citizens make it one of the world’s largest economic powers. Given that 2007 marks another important milestone – five years of using euro notes and coins in our everyday life – it is worth recalling the benefits the single currency has brought.
We all gain from the stability created by the macroeconomic framework of EMU which brings price stability and sound public finances. Individuals and enterprises benefit from the ease with which they can travel and conduct business across borders. EMU facilitates trade integration, reduces costs and can help us generate growth and jobs. A single currency makes prices comparable, leading to greater competition and more opportunity. As capital markets integrate, investment becomes easier and cheaper. The euro’s emergence as a strong international currency in turn grants Europe a stronger role in the world. With the euro now a familiar part of daily life from the Mediterranean to the Arctic Circle, it provides tangible evidence of our common European identity.
Making the common currency a reality is a remarkable achievement of which all Europeans can be proud. The story of that achievement – how the euro came into being, how it is managed and the benefits it brings – is set out in this brochure. I hope you enjoy reading it."

Joaquín Almunia
Commissioner for Economic and Monetary Affairs


The transfer to the ECU, from concept to hard currency

Frederik A. von Dewall , 1995

"The European Commission set up the Expert Group on the changeover to the single currency in May 1994 with the remit of advising the Commission on the technical preparations for introducing the single currency into the European Union. The Expert Group was also requested to initiate the preparations needed to bring about a common currency. The Expert Group consists of representatives of major sectors and sections of the community in Europe and is under the chairmanship of Mr Cees Maas. The Expert Group completed its interim report which was presented to EU vice-president Christophersen.
Recently the Expert Group has completed hearings with representatives of important sectors in the European economy, including consumers and financial institutions. These hearings served several goals: informing the various economic sectors in the EU, to learn what the contribution of these sectors could be to ensuring the smoothest possible introduction of the common currency and a listing of the bottlenecks. Viewed in this light, the recommendations and proposed solutions in the interim report are purely provisional conclusions. This applies all the more so to those subjects on which the Expert Group has explicitly said that a further exchange of ideas is indispensable. In its final report, which is now being written, the Expert Group will reach its final conclusions.
This article will, however, discuss and comment on the main problems highlighted by the Expert Group in its interim report. However, it goes without saying, that the public statements at the informal Econfin in Versailles of April on notes and coins and the most likely timetable, are strongly favoured by me.
The Expert Group has not, and will not, concerned itself with academic issues such as the optimum currency area. These issues have meanwhile become non-topics. The Maastricht Treaty is after all a reality..."

[Mrt: This "Expert Group" is also known under name "Maas Group"]




[Mrt: Decided that this page deserves its post]


IMF - The Federal Reserve System Balance Sheet: What Happened and Why it Matters

The Federal Reserve System Balance Sheet: What Happened and Why it Matters
Peter Stella

Turning now to consider assets which can be considered risk free:

Claims on the U.S. government and gold are considered as having zero credit risk. We also consider claims on GSEs, and GSE and Agency mortgage-backed securities (MBS) as having zero credit risk although, depending how their acquisition is financed, they may entail interest rate risk. As of end-December 2008, the FRB had not purchased GSE and Agency MBS and held only $7 billion in Agency and GSE securities.34 The FOMC has currently authorized FRBNY to purchase up to $200 billion in GSE direct obligations; up to $1.25 trillion in GSE and agency backed MBS and up to $300 billion in longer-term U.S. Treasuries.
The same treatment ought to be afforded to liquidity providing repos and foreign exchange swaps which are mainly claims on OECD central banks collateralized by their respective currencies. Although these agreements were designed to provide U.S. dollar liquidity to foreign private financial institutions, the credit risk arising from the provision of the credit resides with the liquidity providing central bank—not with the Fed. Nor is there any foreign exchange risk to the FRB as the swaps were designed so that the FRB receives the dollars it has lent out—regardless of the contemporaneous exchange rates—plus a premium to cover the cost of credit (borne by the ultimate commercial bank borrower). As this effectively means the only risk to the FRB is a default by another central bank, a highly unlikely event, these assets are considered for the purposes of this paper as being risk free.

[Mrt: "Claims on US gov. AND Gold" or "Claim on the US gov. AND US gold"? :o) playing with words.]

B. Federal Reserve Bank Ability to Absorb Losses

In a given year, the FRBs and any commercial bank have the same two primary sources to absorb losses from any one of their business lines—earnings and capital.


Other Reserves.
In addition to the assets shown on the balance sheet the FRB has additional sources of strength with which it could cope with losses. The first would involve a revaluation of gold. Although changing nothing in reality, a revaluation of the FRB gold certificates would provide a “paper” profit of approximately $236 billion. If one were concerned with the psychological impact of negative capital, it would be relatively simple to erase it with a revaluation of gold.
A second “reserve” is the difference between the fair market and balance sheet valuation of the UST and Agency securities held in the SOMA. At end-December 2008 this difference amounted to $62.4 billion. In other words, the Fed had $62.4 billion in unrecognized gains on its securities portfolio or, alternatively, were the Fed to have instantaneously sold its entire portfolio into the market at end-December 2008 market prices (clearly an economic impossibility), it would theoretically have absorbed $566.4 billion in monetary base compared with the $502.2 billion balance sheet valuation of the SOMA portfolio at that time. This thought experiment illustrates the ephemeral nature of this “reserve”. Were the Fed actually to sell a large portion of its portfolio outright, interest rates would likely rise, leading to a fall in value of the remaining portfolio. Similarly, in a situation of rising inflationary expectations and rising long-term interest rates, this cushion to absorb liquidity could rapidly evaporate. Conversely, in a situation such as 2008, a deteriorating world economy and sharply declining risk appetite led to a flight to U.S. Treasuries which raised their prices.

Earnings capacity over time.
So far, the discussion has centered on resources available within a one year time frame to cover losses assumed to occur over that time. It is important to recognize however, that the Fed also has a strong ability to generate future income. That is, although current resources might be inadequate to cover losses in a given year, FRB future income generation potential or “franchise” value, would permit it to cover a significant capital shortfall over time without the need to change its policy path. To obtain a hypothetical balance sheet measure of this future income potential, one may consider the present discounted value of an infinite stream of profits amounting to the current 5 year average profit of $30.7 billion per year, discounted by, say, 3 percent. This yields an “asset” valued at over $1 trillion. This hypothetical addition to balance sheet capital may be thought of intuitively as the annuity value of the FRB’s seignorage monopoly.

Coping with a scenario involving one-time losses on the order of $200 billion on a portion of the FRB asset portfolio would entail a decline in FRB capital of approximately $170 billion assuming the other earnings in Table 10 and if none of the “other reserves” discussed above were available or utilized.49 To return to positive equity of $45 billion would then require roughly the retention of all profit during the next 6 years. However, it can legitimately be questioned whether the underlying assumptions on earnings and banknote issuance would hold in a truly catastrophic scenario.

As mentioned above, U.S. banknote demand appears to rise during periods of foreign economic turmoil which may be associated with a “dark” U.S. financial scenario. This correlation appears to have returned in 2008 which witnessed the highest growth rate in banknote demand since 2001. Estimates suggest strong banknote demand from Latin America, Eastern Europe and the United States, particularly in the second half of the year.50

As to the question whether future earnings could be assumed in a dark scenario, readers may be interested in an examination of the Fed balance sheet and earnings profile before and after the Great Depression, which is presented in Appendix I. In one of many ironies connected with the Great Depression, the FRB performed “well” financially but only because they took no balance sheet risk. In fact, bills purchased outright and bills discounted—which at the time was virtually the only form of FRB credit to the private sector, fell from 1 percent of GDP in 1929 to virtually zero in 1934 (see Figure 24). Although the balance sheet did expand sharply during the Great Depression it was driven by an accumulation of government securities and gold..."

[Mrt: Notice the attached picture]


The idea of assigning a different governance structure to different functional roles is new neither in the United States nor in other countries and might be considered an evolutionary rather than revolutionary change.

In the United States, the powers exercised under the Gold Reserve Act of 1934 to manage the U.S. foreign reserves are shared by the U.S. Treasury and the Federal Reserve.60 Monetary policy authority is also shared between two governance structures. The FOMC determines the policy rate and directs open market operations while the Board of Governors has the authority to set required reserves and authorize changes in the discount rate. Authority granted the Fed under the FRA under section 13.3 is further refined: “in unusual and exigent circumstances” to provide discounts to individuals, partnerships and corporations, requires “...the affirmative vote of not less than five [out of seven] Board members....”61 Similarly, the European System of Central Banks, Argentina, Chile, Costa Rica, Korea and the Philippines require a super majority vote to authorize extraordinary or emergency central bank operations.
In Japan, BoJ emergency lending must be approved by the Prime Minister and the Minister of Finance. In Thailand, both the Bank of Thailand Financial Institutions Policy Board and the Cabinet must approve emergency lending. Such operations must be approved in Jordan by both the central bank board and the Council of Ministers. In both Korea and the Philippines, the Monetary Policy Board, not the general board, holds power in an emergency.


Gibson´s Paradox and the Gold Standard

 Robert B Barsky, Lawrence H Summers, 1988


Friday, November 25, 2011

HM Treasury - Review of the sale of part of the UK gold reserves

HM Treasury October 2002

1.1 On 7th May 1999 the Government announced a restructuring of the UK’s reserve holdings to achieve a better balance in the portfolio by increasing the proportion held in currencies. Since then a total of approximately 395 tonnes of gold has been sold at 17 auctions, run by the Bank of England on the Treasury’s behalf. Revenue from the auctions, totalling around $3.5 billion, has been reinvested in interest-bearing foreign currency assets and retained within the reserves.

1.2 The motivation for the restructuring was one of risk reduction. With nearly 50 per cent of the net foreign currency reserves invested in gold, the exposure to a single asset was too great. Historically the volatility of returns on gold has tended to be high relative to the volatility of returns on the fixed income assets held in the reserves portfolio. However, the returns on gold have also tended to be uncorrelated with those on fixed income assets, and even negatively correlated for some time periods. Thus, gold can play an important role in a minimum risk portfolio. However, it is not unique in this role and other assets, such as inflation index-linked bonds, can be usefully employed to diversify portfolios. Optimal portfolio analysis showed that total risk on the net reserves portfolio could be reduced if the proportion of gold in the portfolio was reduced to around 20%. The first auction took place on 6th July 1999 and the programme concluded with the 17th auction on 5th March 2002.

1.3 Part way through the auction programme the National Audit Office undertook a review of the gold sales programme. The report, published in January 2001, concluded that: “in designing and implementing the sales programme so far the Treasury has met successfully its objective to sell in a transparent and fair manner while achieving value for money. The prices achieved at each of the nine auctions have been competitive and well in line with the prices achieved in similar gold sales by overseas central banks. The Treasury’s agent, the Bank of England, has worked hard to keep the gold market well informed and to secure a technically successful sales programme”.1

1.4 The report formed the basis of the Public Accounts Committee (PAC) hearing which took place in February 2001. The PAC report concluded that: “The Treasury are being rigorous in their approach to achieving a reduction in the riskiness of the portfolio in that they are carrying out the sales within a framework of risk assessment and management”.

1.5 As stated above, the motivation behind the restructuring was to reduce risk. As a result of better diversifying the net reserves, the sales programme has resulted in a one-off and permanent reduction in value-at-risk of around 30 per cent...."

[Mrt: Hmmmmm.... :o)]


Thursday, November 24, 2011

IMF - From archives ...a snapshot of a moment from the past, 1999




Monday, September 27, 1999


A QUESTIONER: Is the amount that the IMF will raise from the gold transaction dependent on the market price of gold? In other words, will the recent central bank announcement actually raise the amount the IMF can get from that source?

MS. CHRISTENSEN: Obviously, this figure depends on a certain assumed market price. We have assumed $260 per ounce in the calculations, and I am aware that the market has rallied this morning to, about $281 or $282 dollar per ounce. Now, we have to see where the gold price will settle. Obviously, the gold price is reacting to the news that came out on the wires yesterday--the intentions of central banks in Europe to limit their gold sales and gold lending operations.

[Mrt: Interesting to know the exact date :o) Would be nice to compare when Another got hint about the WGA.
Here is another interesting part of discussion going on about off-market transactions:]


A QUESTIONER: When is this off-market gold operation going to start and with whom? Do you already have a list of central banks interested? And also, maybe if you could explain the mechanism just one more time in the most simple way possible.

MS. CHRISTENSEN: We envisage the gold transactions will take place very soon after the Board has taken the decisions. In terms of central banks, we have identified some central banks that are interested in these operations.
The transactions are actually quite simple. They comprise two legs. The first leg is that the IMF sells gold to a central bank or to a couple of central banks that have obligations due to the Fund, and it sells the gold at the market price on that particular day. The Fund then receives the full proceeds from the gold sales in foreign currency. It keeps the book value, which is SDR 35 per ounce, in the General Resources Account on the balance sheet of the IMF and transfers the profits--which is the difference between the book value and the realized price--to an account that is called the Special Disbursement Account. There, the money will rest for the next 20 years and earn interest, and the interest will be transferred to the ESAF-HIPC Trust and used for financing the HIPC and also the subsidies for the ESAF or successor operations. So, in short, the sale of gold permits the Fund to realize profits. That is why it is necessary to actually have the sale take place. That is the first leg.
In the second leg--and that is why these transactions have no effect on the market--the Fund on the same day agrees to accept gold in repayment for obligations falling due. So countries that normally would pay the Fund, say, a billion dollars would give the Fund the gold back it has just purchased. We are talking about the same central bank and the same market price.
So, the gold does not leave the vaults of the IMF or wherever the gold is held, and it is not possible for that gold transaction to have any impact on the market. It does not impact the physical stock in the gold market or in the central banks, which is also important because there can be no impact on the central bank's reserve policy from this transaction alone.
So the end result is that the Fund ends up having the same amount of gold on its balance sheet. Part of it will be at a revalued price, and the rest will still be held at the SDR 35 per ounce in its balance sheet.

A QUESTIONER: This may be a technical question, but initially we were talking about 10 million ounces of gold. We are now talking up to 14 million ounces of gold. I would be interested to know how high gold would have to be for you to be able to realize the money we are talking about if we actually went back to only selling 10 million ounces of gold. At what gold price would you be able to realize the funding you need for the HIPC by selling 10 million rather than 14 million?

MS. CHRISTENSEN: I would not be able to give you that figure off the top of my head, but I think you can guess it because if you know 14 million provides SDR 1.76 billion and you know we have assumed a gold price of $260 per ounce, you can pro-rate the figures and find out the result.

A QUESTIONER: Finally we have got this gold sorted out, and I am wondering whether there wasn't some deal somewhere, that somebody would do something to push the price up enough so that the 14 million wouldn't in fact have to be revalued?

MS. CHRISTENSEN: I am not aware of any connection between the decisions of the Fund and the European central banks.

A QUESTIONER: A couple of questions that may seem naive. First, why is it that the gold stocks are not revalued on sort of a market basis? This is background for why if the market gold price is $260 per ounce, you have it valued so much lower and why that is not an automatic thing.
Second, is just an explanation of why and where the interest is coming from on this special account. Why the transfer into this Special Disbursement Account?

MS. CHRISTENSEN: On your first question, if you look at the way central banks, the official holders, value gold holdings, there is no agreed way of doing it. I think most central banks use some valuation that uses some discount from the market price. But I believe in the case of the U.S., it is still the old valuation of--$42 per ounce--that is used in its balance sheets, which is essentially the same as the IMF's valuation.
Now, for the IMF's part, our valuation is written into our Articles of Agreement, which, as you know, were originally drafted in 1944, but have been amended from time to time. So we cannot use a different price than the SDR 35, except for gold that we receive in payment for debt service obligations--where we are obliged to use the price at which we receive it. To revalue the Fund's gold holdings would require changing the Articles of Agreement.
On your second question, the Articles of Agreement prescribe that the profits from gold sales go to the Special Disbursement Account. Otherwise, I guess it could go directly to the ESAF-HIPC Trust. So we hold it in that Special Disbursement Account, which is outside the General Resources Account. Then we invest those resources and earn the interest, which is then transferred to the ESAF-HIPC Trust.
These accounts are pretty technical and Fund-specific. They are explained in our Annual Report, which was just released.

A QUESTIONER: How much extra money are you going to get now that the gold price has gone up by $20 an ounce? I mean, between what you would have gotten yesterday and what you would have gotten today.

MS. CHRISTENSEN: The ratio is clear in terms of what is 20 over 260, but I do not think it is wise to say that we need less gold sales at this point. I mean, what we have seen is one day's gold price, and the gold price has fluctuated so dramatically over the last year in response to announcements and so forth, and I think the market needs to digest what is going on and evaluate the statements of central banks.

A QUESTIONER: Just two questions. Could you just bring us back up to date on the number of countries that have benefitted from HIPC, who have received relief, and then what is the number that is supposed to get additional relief or the total? And then just clarify again, please, the figure used at the outset, the SDR 3.9 billion ($3.5 billion)--that is, just the IMF and the bilateral, not all of the Cologne thing. That does not include World Bank or any of the other stuff.

MS. CHRISTENSEN: Just the IMF. Mr. Boote can explain.

MR. BOOTE: So far, nine countries have reached their decision points under the Initiative. We have committed about $7 billion to them, as "we" the international community, to be clear. The "we" is not the Fund here. And we have delivered assistance to four countries that have reached the completion point. So, nine, including those four, have reached decision points, and the overall number of countries we now would expect to be eligible would be probably somewhere in the mid-thirties. We are exhorted, and it is very much our intention, to try and get as many countries as possible to the decision point before the end of 2000.
However, I have to stress that it also depends on what countries do. A key element of that will be something we have not really talked about, and probably appropriately, but there is a major change in the sense of what is being expected or asked for from countries--with a lot of emphasis on nationally owned poverty reduction strategies as being a centerpiece of both Bank and Fund lending. Obviously, that is something that you cannot produce overnight. So, in a sense, that will be a very important element of the time table that I have referred to.
I can also confirm that all of the numbers we have been talking about are the costs to the Fund of the HIPC Initiative. In U.S. dollar terms, 2.3 billion, which is the total costs projected of the enhanced initiative, plus the costs of the continuation of the ESAF, which is in those terms about $1.2 billion giving you a total roughly of $3.5 billion.
The overall costs of the Initiative, you are talking about rising from just over $12 billion to just over $27 billion. But that is the cost of the international community, which is split roughly 50/50 between bilateral creditors and multilateral institutions. The other multilateral institutions are being discussed later today in the Development Committee.

A QUESTIONER: At the risk of seeming really dumb, there is one thing that I do not understand at all in this story. If it is so simple and so wonderful to just use this mechanism that enables you to revalue the gold without upsetting the market, why wsan't it done in the first place? Why was there all this talk about selling the gold, which upset absolutely everybody, before we came to this solution? It is something I have never really understood at all.

MS. CHRISTENSEN: Well, I guess the transactions are relatively simple to explain, but they do have an impact on the Fund's financial situation, because there is a difference between market sales and off-market transactions. If you sell the gold, the gold holdings of the Fund are reduced. However, if we have off-market transactions, the Fund's gold holdings remain unchanged, but the IMF does not receive the dollars back it would otherwise have received in repayment. So, in that sense, there is a liquidity impact on the IMF corresponding to the profits from the gold sales.

A QUESTIONER: Let me perhaps try that in a slightly different way. When the 10 million ounces was announced, by the G-7, it was announced as a fait accompli, and then all this opposition, perhaps unexpectedly, came up. Does the Fund have any sort of idea that the areas where opposition came, particularly in the U.S. Congress, that they are happier with this plan than they are with the idea of just outright sales?

MS. CHRISTENSEN: I know that the Congress is aware of those plans, and I believe they are discussing them at the moment. I do not want to comment on whether they are happy or unhappier with these plans than the original plans.

MR. BOOTE: I can add something on that, perhaps. I think there was quite an effective campaign by the World Gold Council, and I think the World Gold Council has said on the record that actually it welcomed this proposed change because it recognized exactly what Benedicte has described to you, that an off-market transaction does not have and cannot have any impact on the gold price.
So, I mean, there was a lot of concern, understandably, about what was happening to gold prices--which I think was due to a multitude of factors, of which prospective IMF on-market sales were only a relatively minor one, but nevertheless there was a lot of concern.
I would myself see--and this goes back to an earlier question--the issue of what the central banks did as being a response to that actually, because central banks have a lot of gold holdings in their reserves (i.e., this is an important asset for them). They are not interested in destablizing the gold market either. So, in that sense, I would see that announcement as being in their own interest. I have not seen anything more than the press coverage of it this morning.

A QUESTIONER: Just to try to press the point one more time. I think the original question was, since this is clearly the correct way to do it, why wasn't this done in the first place, rather than proposing on-market sales?

MS. CHRISTENSEN: Again, because it does have, as I mentioned, an impact on the IMF's liquidity. In off-market transactions, the IMF agrees to accept gold back, and it would otherwise have received what is equivalent to the SDR 1.76 billion back in--say, dollars, in cash. So it means the IMF has less cash than it would otherwise have received under normal circumstances. So it impacts what the IMF has available in loanable resources to countries, and that is why we, in the first instance, proceeded with the market sales.

A QUESTIONER: Why is it that all the gold sales aren't going only into the HIPC? Why is part of it, one-third, going into the funding for the ESAF?

MS. CHRISTENSEN: Actually, all funding--the investment income on the gold proceeds and also all the bilateral contributions--go into one pot, which is called the ESAF-HIPC Trust. In a sense, they finance both the Fund's contribution to the HIPC Initiative, and also the subsidy requirements on the loans for the ESAF. As you probably know, the interest rate is only half-a-percent. So it is very concessional for the low-income countries.

MR. BOOTE: I would like to add to that. The question is why, and the answer to the question of why is because the Fund's Board has always considered the continuation of the ESAF, which is the instrument through which the Fund contributes to the HIPC initiative.
For example, the grants we provide to countries to give them debt relief under the HIPC initiative are through ESAF, and it is also precisely the facility to which the Fund lends to HIPC cases and which helps HIPC cases get, for example, to the decision and the completion point. So there has always been in our mind an extricable link between the two, and therefore, the funding effort has always been seen as a combined effort, and therefore, we have this combined ESAF/HIPC Trust. But there is a policy reason for that. It is not an accident. It reflects our view of the appropriate relationship between the two things--they are inextricably linked.

A QUESTIONER: I have a last question on gold sales. If you would have been able to go forward with real gold sales, would you have had more money available for supporting the HIPC, or would you just have sold way less than you are now doing yourself?

MS. CHRISTENSEN: Whether we sell gold in the market, or in off-market transactions, we realize exactly the same profits. So we will have to sell exactly the same amount.

A QUESTIONER: But you would also have available cash dollars instead of just having back the gold.

MS. CHRISTENSEN: Yes. But if we had sold gold in the market--and therefore would have gotten the cash back instead of the gold back from countries that are repaying us--we could not use that for the ESAF/HIPC Trust because, again, we are not allowed to transfer directly from our General Resources to the ESAF-HIPC Trust.
The only vehicle we have is realizing profits in gold sales, and that is why we have to go through these various transactions.

MR. MURRAY: Great. Thank you very much.

IMF - IMF Releases the Operational Guidelines for the Data Template on International Reserves and Foreign Currency Liquidity

Balance of Payments Statistics

IMF Releases the Operational Guidelines for the Data Template on International Reserves and Foreign Currency Liquidity

"The International Monetary Fund (IMF) recently issued its Operational Guidelines for the Data Template on International Reserves and Foreign Currency Liquidity (Washington, D.C., October 1999). The IMF prepared the operational guidelines to assist countries to compile data for the template on international reserves and foreign currency liquidity. The IMF and a working group of the Committee on the Global Financial System (CGFS) of the Group of Ten central banks jointly developed the template. (See also “Reserves Template to Help Strengthen the International Financial Architecture” in the midyear 1999 issue of this Newsletter.)

The data template is designed to provide a comprehensive account of countries’ international reserves and other foreign currency assets and of drains on such resources arising from various foreign currency liabilities and commitments of the authorities. The public disclosure of such information by countries on a timely and accurate basis will promote informed decision-making in the public and private sectors, thereby helping to improve the functioning of global financial markets.

The template is a prescribed category of the IMF’s Special Data Dissemination Standard (SDDS). The transition period for SDDS subscribing countries to provide the template data ends on March 31, 2000. Following the end of the transition period, SDDS subscribing countries will need to disseminate their template data on a monthly basis with a lag of no longer than one month.

The operational guidelines clarify data concepts, definitions, and classifications and discuss ways to report the requisite data in the template. The guidelines are presented in five chapters and a number of appendices. Chapter One of the document provides an overview of the genesis of the template and outlines its structure and key features. The chapter is primarily intended for those readers, including members of the press, interested in a general understanding of the template. The later chapters and the appendices, which are more technical, are designed to facilitate compilation of the template by data providers. In developing the guidelines, the IMF staff consulted with IMF member countries, the CGFS, and the European Central Bank. (See also the article on “What Are International Reserves? How Are They To Be Compiled?” on pp. 3-10 of this issue of the Newsletter.)..."


***Only certain financial assets qualify as international reserves. ***

Reserve assets include only certain financial instruments. The BPM5 lists among reserve assets these instruments: foreign exchange (consisting of holdings of securities, currency and deposits, and financial derivatives), monetary gold, special drawing rights (SDRs), reserve position in the Fund, and other claims. These classifications correspond to “foreign currency reserves,” “gold,” “SDRs,” “IMF reserve position,” and “other reserve assets,” respectively, in the data template on international reserves and foreign currency liquidity, for which the Guidelines are developed.

Monetary gold, SDRs, and reserve positions in the Fund are considered reserve assets because they are owned assets readily available to the monetary authorities in unconditional form. Foreign exchange and other claims in many instances are equally available and therefore qualify as reserve assets. The following recommendations are advanced in the Guidelines to assist compilers to determine what financial instruments should be included in reserve assets:

  • For securities, they should be highly liquid, marketable equity and debt securities;5 liquid, marketable, long-term securities (such as 30-year U.S. Treasury bonds) can be included. Nonissued securities (that is, securities not listed for public trading) are excluded; such securities are deemed not to be marketable and liquid enough to qualify as reserve assets.

  • Only foreign currency securities issued by nonresident entities should be included; these cover securities issued by institutions headquartered in the reporting country but located abroad, as well as those issued by institutions headquartered and located abroad.

  • Currency consists of monetary authorities’ holdings of foreign currency notes and coins in circulation and commonly used to make payments. Commemorative coins and uncirculated banknotes are excluded.

  • Deposits to be included are those available on demand; these generally are referred to as demand deposits. Term deposits that are redeemable upon demand can also be included. Deposits in reserve assets are those held in foreign central banks, the Bank for International Settlements (BIS), and other banks. The term “banks” generally refers to financial depository institutions6 and encompasses such institutions as “commercial banks, savings banks, savings and loan associations, credit unions or cooperatives, building societies, and post office savings banks or other government-controlled savings banks (if such banks are institutional units separate from government).”7

  • Under the residency concept set forth in the BPM5, monetary authorities’ deposits held in resident banks (including banks headquartered and located in the reporting country and banks headquartered abroad but located in the reporting country) do not constitute external claims on nonresidents and are not considered reserve assets. Nonetheless, the BPM5 permits the authorities’ foreign currency deposits held in resident banks (banks located in the reporting country, whether they are domestically or foreign controlled) to be included in reserves under certain restrictive circumstances. In particular, this may be permitted when the banks located in the reporting country have counterpart foreign currency claims upon nonresident entities and the counterpart claims are under the effective control of the monetary authorities and readily available to them to meet balance of payments financing and other needs.

  • Because short-term loans provided by the monetary authorities to other central banks, the BIS, the IMF (such as the ESAF Trust Loan Account), and depository institutions are much like deposits, it is difficult in practice to distinguish the two. For this reason, the reporting of deposits in reserve assets should include short-term foreign currency loans that are redeemable upon demand made by the monetary authorities to these nonresident banking entities.

  • Short-term foreign currency loans that are available upon demand made by the monetary authorities to nonresident nonbank entities, however, are not deposits but can be disclosed in “other reserve assets.”

  • Long-term loans provided by the monetary authorities to nonresidents, which would not be readily available for use in times of need, are not reserve assets.

  • Reserve position in the IMF is the sum of (1) SDR and foreign currency amounts that a member country may draw from the IMF at short notice and without conditions from its “reserve tranche,”8 and (2) indebtedness of the IMF (under a loan agreement) readily available to the member country including the reporting country’s lending to the IMF under the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB).

  • SDRs are international reserve assets the IMF created to supplement the reserves of IMF member countries. SDRs are allocated in proportion to countries’ respective quotas in the IMF.

  • Gold is treated as a financial instrument because of its historical role in the international monetary system. As noted earlier in footnote 4, gold held by monetary authorities as a reserve asset is referred to as monetary gold. All other gold of the authorities (e.g., gold held for trading purposes) is not monetary gold and should not be included among reserve assets. In addition, holdings of silver bullion, diamonds, and other precious metals and stones10 are not reserve assets.

  • Gold deposits are to be included in gold and not in total deposits. In reserves management, it is common for monetary authorities to have their bullion deposited with a bullion bank, which may use the gold for trading purposes in world gold markets. The ownership of the gold effectively remains with the monetary authorities, which earn interest on the deposits, and the gold is returned to the monetary authorities on maturity of the deposits. The term maturity of the gold deposit is often short, up to six months. To qualify as reserve assets, gold deposits must be available upon demand to the monetary authorities. To minimize risks of default, monetary authorities can require adequate collateral (such as securities) from the bullion bank. It is important that compilers not include such securities collateral in reserve assets, thereby preventing double counting.

  • In reserves management, monetary authorities also may undertake gold swaps. In gold swaps, gold is exchanged for cash and a firm commitment is made by the monetary authorities to repurchase the quantity of gold exchanged at a future date. Accounting practices for gold swaps vary among countries. Some countries record gold swaps as transactions in gold, in which both the gold and the cash exchanged are reflected as offsetting asset entries among reserve assets. Others treat gold swaps as collateralized loans, leaving the gold on reserve assets, as well as recording the cash received among foreign exchange in reserve assets, counterbalanced by a liability entry on the balance sheet of the monetary authorities. To enhance data transparency, it is recommended that countries disclose the accounting methods used in supplementary information.

  •  “Other reserve assets” include assets that are liquid and readily available to the monetary authorities but not included in the other categories of reserve assets. These assets can include (1) net, marked-to-market value of financial derivatives positions (including, for instance, forwards, futures, swaps, and options) of the monetary authorities with nonresidents, if the derivative products pertain to the management of reserve assets, are integral to the valuation of such assets, and are under the effective control of the monetary authorities; such assets must be highly liquid and denominated and settled in foreign currency; and “net” refers to asset positions offset by liability positions (i.e., netting by novation); (2) short-term foreign currency loans redeemable upon demand provided by the monetary authorities to nonbank nonresidents; and (3) repo assets that are liquid and available upon demand to the monetary authorities.


*** Reserve assets are to reflect their market values. ***

How should reserve assets be valued?

In principle, “reserve assets” are to be valued at market prices. In practice, however, accounting systems may not generate actual market values on all reporting dates for all classes of instruments. The Guidelines recommend that, in these cases, approximate market values may be substituted. Other recommendations proffered in the Guidelines for the valuation of reserve assets include the following:
  •  The market valuation should be applied to reserve assets (that is, the stock of the assets) on the reference date (that is, at the end of the appropriate reporting period). If necessary, the stock of assets on the reference date can be approximated by adding the net cumulating flows during the reference period to the stock at the beginning of the reference period.

  •  In valuing reserve assets, interest earnings, as accrued, on such foreign currency assets should be included.

  •  Periodic revaluations of the different types of assets should be undertaken to establish benchmarks on which future approximations can be based. It is recommended that such benchmark revaluations be undertaken at least on a quarterly basis. For each reporting period, at a minimum, the value of foreign currency instruments should be adjusted using the market exchange rates applicable on the reference date to arrive at an approximate market value of the assets.

  •  The stock of equity securities of companies listed on stock exchanges can be revalued based on transaction prices15 on the revaluation date. If such transaction prices are not available, the midpoint of the quoted buy and sell prices of the shares on their main stock exchange on the reference date should provide a useful approximation.

  •  The market value of currency and deposits generally is reflected in their nominal (face) value. For debt securities, the market price is the traded price on the reference date and includes accrued interest. If that value is not available, other methods of approximation include yield to maturity, discounted present value, face value less (plus) written value of discount (premium), and issue price plus amortization of discount (premium).

  •  With respect to financial derivatives, for futures contracts, this involves marking to market, which usually precedes the daily settlement of gains and losses. The market value of swap and forward contracts is derived from the difference between the initially agreed contract price and the prevailing (or expected prevailing) market price of the underlying item. The market values of options depend on a number of factors including the contract (strike) price, the price and price volatility of the underlying instrument, the time remaining before expiration of the contract, and interest rates.

  •  Monetary gold is valued at the current market price of commodity gold.
[Mrt: Note, re-read, note that it hints that there exists some other price of gold, the inter CB one.]

  •  SDRs are valued at an administrative rate determined by the IMF. The IMF determines the value of SDRs daily in U.S. dollars by summing the values, which are based on market exchange rates, of a weighted basket of currencies. The basket and weights are subject to revision from time to time.
  •  The reserve position in the IMF is valued at a rate reflecting current exchange rates (of the SDR against the currency used to report the template data for the reserve tranche position, and of the currency in which loans are denominated in the case of outstanding loans to the IMF by the reporting country).
    How are financial instruments classified among reserve assets?

    Reserve assets include only certain financial instruments. The BPM5 lists among reserve assets these instruments: foreign exchange (consisting of holdings of securities, currency and deposits, and financial derivatives), monetary gold, special drawing rights (SDRs), reserve position in the Fund, and other claims. These classifications correspond to “foreign currency reserves,” “gold,” “SDRs,” “IMF reserve position,” and “other reserve assets,” respectively, in the data template on international reserves and foreign currency liquidity, for which the Guidelines are developed.

    Monetary gold, SDRs, and reserve positions in the Fund are considered reserve assets because they are owned assets readily available to the monetary authorities in unconditional form. Foreign exchange and other claims in many instances are equally available and therefore qualify as reserve assets.


    4 Gold included in reserve assets is referred to as “monetary gold” in the BPM5.

    12 Such gold swaps generally are undertaken between monetary authorities and with financial institutions.
    13 This treatment is consistent with BPM5 (para. 434) to the extent that the swap is between monetary authorities. The rationale is that in a gold swap, the monetary authorities swap gold for other assets (such as foreign exchange) and that this involves a change in ownership. The ownership of gold is retransferred to the original owner when the swap is unwound at a specific date and at a specific price.
    14 This treatment applies only when an exchange of cash against gold occurs, the commitment to buy back the gold is legally binding, and the repurchase price is fixed at the time of the spot transaction. The logic is that in a gold swap the “economic ownership” of the gold remains with the monetary authorities, even though the authorities temporarily have handed over the “legal ownership.” The commitment to repurchase the quantity of gold exchanged is firm (the repurchase price is fixed in advance), and any movement in gold prices after the swap affects the wealth of the monetary authorities. Under this treatment, the gold swapped remains as a reserve asset and the cash received is a repo deposit. Gold swaps commonly permit central banks’ gold reserves to earn interest. Usually, the central banks receive cash for the gold. The counterparty generally sells the gold on the market but typically makes no delivery of the gold. The counterparty often is a bank that wants to take short positions in gold and bets that the price of gold will fall or is one that takes advantage of arbitrage possibilities offered by combining a gold swap with a gold sale and a purchase of a gold future. Gold producers sell gold futures and forwards to hedge their future gold production. Treating gold swaps as collateralized loans instead of sales also obviates the need to show frequent changes in the volume of gold in monetary authorities’ reserve assets, which, in turn, would affect world holdings of monetary gold as well as the net lending of central banks.


    PIIE - IMF response to the World Gold Council

     Stanley Fisher; 13 August 1999


    "Thank you very much for the copies of the interesting study "A Glittering Future? Gold Mining's Importance to Sub-Saharan Africa and Heavily Indebted Poor Countries" which was commissioned by the World Gold Council. The study and your letter raise a number of important issues.
    Let me assure you that I share your concerns about the social impact of the long-term decline in the gold price on many low-income countries. This decline has resulted from a variety of factors, including cyclical developments, the diminished attraction of gold as an investment alternative, expansion of mine output, central bank lending of gold, and the declining role of gold as a monetary asset..."

    "A pure revaluation of the Fund´s gold would result only in an accounting gain and would not provide the cash resources needed to fund the initiatives. Moreover, a revaluation of gold is inconsisten with the Tund´s Articles of Agreement."

    [Mrt: I am having difficulty in understanding this part, any ideas? What inconsistency in particular? Are Articles somehow blocking revaluation? Is it about revaluation of IMF gold in particular or gold price in general?]

    "We seek to find a solution for debt relief that will minimize prices on the poorest countries. We seek to find a solution for debt relief that will minimize the impact on the market of the mobilization of the Fund´s gold at the same time while obtaining the needed funding for the ESAF and HIPC initiatives on a timely basis."


    [Mrt: The above mentioned study is found here:]

    A Glittering Future? Gold mining’s importance to sub-Saharan Africa and Heavily Indebted Poor Countries

    • One of the overlooked consequences of the recent gold price fall has been a setback to the development of some of the world’s poorest and most heavily indebted nations.
    • Of the world’s 41 Heavily Indebted Poor Countries (HIPCs) more than 30 are gold producers with at least 12 producing in excess of 3 tonnes a year. Production is rising in a number of HIPCs and the group’s total output is likely to be around 200 tonnes, on cautious estimates, in the year 2000, generating, at the price prevailing in mid-May 1999, more than $1.6bn in export revenues.
    • In 9 HIPCs, gold accounts for at least 5% of export revenues with around 5 countries likely to join this group in the near future, and possibly more in the medium term. In some countries – Ghana, Guyana and Mali – gold accounts for more than a fifth of export revenue; Guinea and Tanzania are likely to join this group shortly.
    • Sub-Saharan Africa, which includes 33 of the 41 HIPCs, currently produces 25.1% of the world’s gold. Three-quarters of this – 18.5% – is produced by South Africa but the share of global output of the remaining countries has doubled since 1990.
    • In sub-Saharan Africa, gold comprises 7.8% of total exports of goods; discounting South Africa, 2.5%. In round terms, gold earns sub-Saharan African nations almost $7bn a year in foreign revenue.
    • The damaging effect of the gold price fall on these countries goes far beyond the immediate impact on export revenues. Gold-mining’s multiplier effects bring additional jobs, wages and government taxes. Mining facilitates the growth of legal, physical and financial infrastructure.
    • Gold mining is sometimes one of the few available channels for diversifying a country’s exports and production, which in turn is often a critical stage in the development process.
    • The paradox is that the future growth of these nations is being undermined by precisely those who wish to proffer a helping hand – the International Monetary Fund and the governments of some well-developed countries.
    • With the threat of gold sales from the IMF, Switzerland and the UK, the price of gold has fallen sharply. Key members of the IMF have said they wish to see it sell as much as 311 tonnes of its gold to fund debt relief.
    • Sales and the threat of sales by central banks and the official sector are the single biggest factor preventing a price recovery. This represents a major obstacle to the expansion of gold mining in underdeveloped nations, and thus diminishes opportunities for genuine, long-lasting and sustainable economic growth in gold-producing HIPCs."


    TT - Introducing Think-tanks: Peterson Institute for International Economics

    "The Peter G. Peterson Institute for International Economics is a private, nonprofit, nonpartisan research institution devoted to the study of international economic policy. Since 1981 the Institute has provided timely and objective analysis of, and concrete solutions to, a wide range of international economic problems. It is one of the very few economics think tanks that are widely regarded as "nonpartisan" by the press and "neutral" by the US Congress, and its research staff is cited by the quality media more than that of any other such institution.
    The Institute, which has been directed by C. Fred Bergsten throughout its existence, attempts to anticipate emerging issues and to be ready with practical ideas, presented in user-friendly formats, to inform and shape public debate. Its audience includes government officials and legislators, business and labor leaders, management and staff at international organizations, university-based scholars and their students, other research institutions and nongovernmental organizations, the media, and the public at large. It addresses these groups both in the United States and around the world.
    The Institute's staff of about 50 includes more than two dozen senior fellows, who are widely viewed as one of the top groups of economists at any research center. Its agenda emphasizes global macroeconomic topics, international money and finance, trade and related social issues, energy and the environment, investment, and domestic adjustment policies. Current priority is attached to the global financial and economic crisis, globalization (including its financial aspects) and the backlash against it, international trade imbalances and currency relationships, the creation of an international regime to address global warming and especially its trade dimension, the competitiveness of the United States and other major countries, reform of the international economic and financial architecture, sovereign wealth funds, and trade negotiations at the multilateral, regional, and bilateral levels. Institute staff and research cover all key regions—especially Asia, Europe, Latin America, and the Middle East, as well as the United States itself and with special reference to China, India, and Russia.
    Institute studies have helped provide the intellectual foundation for many of the major international financial initiatives of the past three decades: reforms of the International Monetary Fund (IMF), including those initiated by the G-20 in 2009–10, adoption of international banking standards, and broader financial regulatory reforms, exchange rate systems in the G-7 and emerging-market economies, policies toward the dollar, the euro, the Chinese renminbi, and other important currencies, rebalancing of global account imbalances and currency misalignments; and responses to debt and currency crises (including the current crisis of 2008–09 and its European component in 2010). The Institute has made important contributions to key trade policy decisions including the Doha Round, the restoration and then the extension of trade promotion authority in the United States, the Uruguay Round and the development of the World Trade Organization, the North American Free Trade Agreement (NAFTA) and other US free trade agreements (notably including Korea), the Asia Pacific Economic Cooperation (APEC) forum and East Asian regionalism, initiation and implementation of the Strategic and Economic Dialogue between the United States and China, a series of United States–Japan negotiations, reform of sanctions policy, liberalization of US export controls and export credits, and specific measures such as permanent normal trade relations (PNTR) for China in 2000, import protection for steel, and Buy American legislation in 2009.
    Other influential analyses have addressed economic reform in Europe, Japan, the former communist countries, and Latin America (including the Washington Consensus), the economic and social impact of globalization and policy responses to it, outsourcing, electronic commerce, corruption, foreign direct investment both into and out of the United States, global warming and international environmental policy, and key sectors such as agriculture, financial services, steel, telecommunications, and textiles.
    The Institute averages one or more longer publications per month along with one or more Policy Briefs and working papers. It holds one or more luncheon or dinner meetings, seminars, or conferences almost every week to discuss topical international economic issues. Its website averages 550,000 visits and over two million page views per month.
    The Institute's annual budget is about $10 million. Support is provided by a wide range of charitable foundations, private corporations, and individual donors and from earnings on the Institute's publications and capital fund. In 2001 it moved into its new building, which received an Award of Excellence for Extraordinary Achievement in Architecture by the American Institute of Architects and a Best Architecture in Washington Award by the Washington Business Journal. It celebrated its 25th anniversary in 2006 and adopted its new name at that time, having previously been the Institute for International Economics. A more extensive description of the Institute can be found in The Peter G. Peterson Institute for International Economics at Twenty-Five [pdf], an essay prepared by Director C. Fred Bergsten on that occasion."


    Wednesday, November 23, 2011


    The Guide
    The IBMA Terms (English law version)
    The IBMA (New York law version)


    BIS - Mr. Reddy discusses gold banking in India

    Mr. Reddy discusses gold banking in India
    Address by the Deputy Governor of the Reserve Bank of India, Dr. Y.V. Reddy,
    at the World Gold Council Conference held in New Delhi on 02/08/97.

    "(i) Let me summarise the arguments of aggressive liberalisers.

    - The gold industry, employing goldsmiths numbering about five lakhs, involving an annual turnover of about Rs.25,000 crore, is kept out of any serious consideration in the current reform process. This reflects continuation of a gold-control mindset and the identification of all import, sale or use of gold with black money. Consequently, gold industry exporters of jewellery and genuine purchasers of gold jewellery continue to suffer.

    - On account of the present policy, the purchaser of gold jewellery pays a higher price of about Rs.3,000 crore every year because of the “hawala” premium, etc. In percentage terms, at wholesale level, it is an extra 17 per cent. Also, because of lack of consumer protection, and improper certification of quality, the purchaser loses about Rs.4,000 crore each year.

    - The present gold policy shows anti-rural bias. The real purchaser of gold is typically a peasant. Close to seventy per cent of gold jewellery is sold in rural areas and most of gold sales are by way of jewellery. To quote Professor Jeffrey A. Franks, “holding gold has in fact often in history served, from France to India, as the only way the peasant can protect himself against inflation and the vicissitudes of politics”.

    - Similarly, there is a gender bias, since most of the jewellery is sought by women. While macho consumer durable components are imported and their production or even consumption financed, a non-depreciating asset like gold is discriminated against. It makes no sense to constrain the demand for “a multi-purpose indestructible asset” like gold or gold jewellery, which is a lifetime asset, a hedge against inflation, a source of liquidity and a preferred form of saving.

    - From a fiscal point of view, the NRI route generated about Rs.500 crore towards customs in a year. The “officialising” of gold import by liberal import of gold will give Rs.250 crore per annum more towards customs, with duties at the same rate as for NRIs. Further, if gold is imported freely under OGL, gold trade down the line becomes traceable and will provide sales tax to State Governments and octroi to local bodies.

    - From a trade policy point of view, the existing restrictions on gold jewellery-producing units like EOUs constrain the participants in the export market and hamper export growth. Free import under OGL and free export are pre-conditions for capturing world markets - as is evident from the Turkish experience.

    - Some advocate free import of gold or import under OGL on the ground that there may be a fall in reserves and a desirable impact on the exchange rate. However, most argue that there will be only “officialising” of gold import and use of foreign exchange under hawala, resulting in no net loss of reserves. In fact, once gold jewellery exports pick up, consequent upon gold-import liberalisation, there will be a positive impact on the trade balance.

    - There is no way of getting rid of or at least drastically reducing the hawala market in foreign exchange, so harmful to the social and moral fabric of India, unless gold import is freed and the scope for gold smuggling reduced.

    - As pointed out by the Committee on Capital Account Convertibility, a pre-condition for further reforms in the external sector is free import of gold.

    - Finally, while bank credit is available for import, domestic production or processing and easy acquisition or consumption of luxury goods, no such bank credit is available for gold and gold jewellery employing half a million and providing first-rate security for banks. In fact, the only way of penetrating the informal credit sector without generating non-performing assets is encouraging the flow of bank credit against gold and silver without reference to enduse.

    (ii) The cautious liberalisers avoid the subject of liberal bank credit or regulating the gold market altogether, but concentrate on possible balance of payments impact. Hence, they advocate limited import through designated agencies to meet both exporters and domestic industry.

    (iii) The no-changers feel that the existing import regime is foreign exchange neutral; and existing policy is a reluctant admission of our incapacity to change the mindset of Indians who are wasting their savings on gold. There is no need to assist or develop this “unproductive” sector or activity.

    (iv) There is little support for a total roll-back of policy. There was, however, a suggestion in the context of an analysis of the Report on Capital Account Convertibility in the Economic and Political Weekly (EPW, June 1997). This article reiterated the possible impact of liberalisation of gold import on domestic savings in an adverse way; on diversion of productive resources into unproductive channels; on aiding the process of tax-evasion and hoarding of incomes and assets. Having expressed this, the article states, and I quote, “a more viable policy from the point of healthy and egalitarian development was to recommend the banning of gold imports (other than for jewellery exports and for industrial use), and strict enforcement measures against smuggling”."


    "...Third, in regard to development of gold market, the establishment of a Gold Exchange would help in efficient price discovery and emergence of healthy and transparent practices in the market. The basic framework for such an exchange already exists with 13 banks active in import of precious metals. Five of them have launched the Gold Deposit Scheme also. They are exploring possibilities of introducing ‘paper gold’ products like Gold Accumulation Plans. These banks are fully authorised to sell/lease gold to the market players. They can also enter into forward contracts in a limited way. A committee set up by the RBI has studied the feasibility of introducing Futures Trading in Gold and this is being examined by the Forward Markets Commission. Once the banks start trading among themselves, with MMTC, STC and also with big traders according to the demand/supply dynamics, a formal move towards a Gold Exchange is appropriate. They can even use the infrastructure available with an existing stock exchange like National Stock Exchange (NSE) for this purpose.

    Fourth, as part of the positive approach to consumers, the present initiatives by BIS may be supported, strengthened for improvement, reviewed and further measures considered. For example, several banks and other institutions, which are currently importing gold in large measures, could consider establishing a Gold Market Development Agency as a voluntary self regulatory organisation with participation from gold trade and BIS to devise mechanisms by which the efficiency of the market and the integrity of the products are ensured and augmented. For example, banks can play a role by prescribing different margins for loans extended against the pledge of gold with hallmark and those without. Similarly, the banks could take into account, the practice of issuing Gold Content Guarantee Certificates by the gold jewellers while extending credit. This would also help banks in making proper assessment of the inventories of the traders..."



    Peter A. Abken

    "Recent gyrations in the price of gold may lead one to wonder whether economic theory has any power to explain gold price movements. Some observers believe that “the ongoing frenzy in the gold market may be only an illusion of crowds, a modern repetition of the tulip-bulb craze or the South Sea Bubble.” Has gold fever infected otherwise rational individuals, or is there an economic rationale behind this behavior?..."


    "...To begin, it is useful to distinguish between gold stocks and flows. The stock of gold is the quantity held at a given time, whereas the net flow of gold is the change in that stock during a particular interval of time. Production flows add to stocks as newly mined and refined gold becomes available to the  market; consumption flows deplete stocks as gold isput to uses that render it irrecoverable. Gold’s use in electronics, for example, depletes stocks of gold, since recycling gold is frequently uneconomical in these applications. The metal’s use in art also depletes stocks because once incorporated in a work of art, gold is no longer available to the market. Presumably, if such a work of art is deemed “priceless,” no price of gold would cause the work to be scrapped and the gold to be melted down, regardless of how high the price might be. In view of these distinctions, gold stocks should be understood to mean readily marketable stocks at a particular time..."


    "...Times of economic turmoil and political upheaval tend to produce a demand for gold to safeguard wealth. Gold is a concentrated, anonymous asset. Wealth held in the form of gold is less susceptible to confiscation by governments than wealth held in other forms. Small quantities of gold generally exchange for large physical quantities of other real assets. Gold is therefore highly mobile compared to most other forms of wealth, ideal for taking flight across national boundaries. Also, wealth may be converted from gold into other assets without divulging the precious metal’s history of ownership..."

    "...Particularly during 1979, the political and economic unrest that has beset much of the Middle East and neighboring Asia has engendered a considerable demand for gold as a store of value. Newspaper accounts of activity in the gold market routinely reported the market’s speculation that the Middle Eastern demand for gold was the driving force behind the upsurge in the price of gold in late 1979 and early 1980. But before the international turmoil of 1979, other factors were probably..."


    "...An analysis of the probable effects of official auctions on the gold price based on the model of gold price movements is given in general terms in the following example. After an announcement by the U. S. Treasury of a gold auction, including the quantity to be auctioned and the time of the auction, the actual auction would have little effect on the gold price when it occurs if the market anticipates the auction. The market price would fall in reaction to the initial announcement, entirely discounting the effects of the auction before it takes place. Obviously, the gold market does not predict the effects of such an auction perfectly; the market price changes as forecasts are revised. For example, if the demand at a given price has been underestimated at the time of the auction, the price will rise to clear the market..."

    [Mrt: An older but a nice doc.]


    FRBNY - Review of foreign developments


    Intra-European Financial Arrangements
    Foreign Gold and Dollar Resources


    Tuesday, November 22, 2011


    T H E F E D E R A L R E S E R V E B A N K O F N E W Y O R K


    "...Today, all gold transactions occur at the market price of gold, but prior to 1971 gold transactions between nations were made at an official fixed price. The official U.S. government price of gold has changed only four times during the past 200 years. Since the passage of the Gold Reserve Act of 1934, which raised the official price of gold to $35 a troy ounce, the price has been raised twice: to $38 in 1972, and in 1973, to its current price of $42.2222 an ounce.

    Because of the large disparity between the official price and the market price of gold, the official price has become irrelevant from a transactions perspective.

    Today, no nation is willing to sell gold at the official price, which is used by governments only for bookkeeping and reporting purposes..."

    [Mrt: Interesting description and reasoning :o) Well, some must sell.]


    For centuries, gold had a profound impact on history, as a symbol and a storehouse of wealth accepted universally around the world. Gold functions as a medium of exchange, particularly in areas where currencies are distrusted. Yet gold has not been without controversy. The influential economist, John Maynard Keynes, referred to gold as a “barbarous relic.” Later in the 20th century, former Chairman of the Federal Reserve’s Board of Governors, William McChesney Martin, praised gold as “a beautiful and noble metal. What is barbarous,” Martin said, “is man’s enslavement to gold for monetary purposes.”

    [Mrt: Yes Mr. W.Martin, indeed.]


    BIS - The Banque de France’s view on gold and comments on the euro

    Hervé Hannoun: The Banque de France’s view on gold and comments on the euro
    Speech by Mr Hervé Hannoun, First Deputy Governor of the Banque de France, at a dinner organised by Goldman Sachs on the occasion of the Financial Times Gold Conference held on 26 June 2000. 

    I. Gold

    A. The Banque de France’s view on gold is based on three main pillars:
    • We are in favour of gold holding
    • We are against gold selling
    • We have a very prudent and conservative approach to gold lending

    1. Gold holding

    The Banque de France is a major gold holder (with more than 3,000 tons). The creation of the single currency has in no way modified our policy and motivations for holding gold, which remains in our view an important reserve asset.
    Let us review the reasons why central banks want to hold gold. What is the rationale for holding gold, a non-interest bearing asset, given that there is no more official role for gold since the collapse of the gold exchange standard?

    – First, security: the absence of any credit risk is an intrinsic quality of gold: gold offers full security as long as it is properly stowed in central banks’ vaults.

    – Second, liquidity: in situations of political turmoil or high global inflation, gold’s liquidity is unchallenged. Certainly, in circumstances of orderly financial markets, gold is not the most liquid of assets (even though it is probably the most liquid of commodities). But its liquid quality becomes apparent and increases as uncertainty grows. In this regard, the absence of a return on gold can be viewed as the price of its “option component”: contrary to most other assets, gold prices go up when things go wrong.

    – Third motivation for holding gold: diversification.

    Gold bears no interest coupon. If lent, the lending rate is relatively modest. Then there is usually a cost of carry for gold holdings. This is partially offset by the “option component” I mentioned before. But gold is also a very good diversification instrument. Indeed in the long run, the price of gold has shown a very low and even a negative correlation with the dollar (the first-ranking reserve currency) and with US Treasuries. So gold is very useful to build a diversified portfolio as it enables you to improve your risk/return profile.

    On the whole, I would say that gold is an asset of last resort par excellence and that recent market developments have in no way altered its intrinsic qualities. There is still a rationale for central banks to hold gold.

    2. Gold selling

    After having listed all the good reasons for holding gold, you will not be surprised if I reiterate that we have no plans to sell gold!

    The leading official holders of gold have not changed their attitude in this respect. Neither the American Federal Reserve System, nor the German Bundesbank, nor the Bank of Italy, nor the Banque de France have any plan to sell gold.

    3. Gold lending

    Concerning gold lending, the Banque de France, as most of you probably know, is definitely not among the active players in the market. Quite the contrary, alongside the other major holders, it has refrained from an active management of its gold holdings. The Banque de France has always adopted a very prudent and rather conservative approach, acknowledging the fact that the issue of gold lending is a matter of common interest to the major holders.

    Two main reasons are traditionally put forward to justify gold lending:

    – The first one refers to a question of principle. Foreign currency assets are actively managed. Why not extend this management to gold insofar as gold is considered to be part of a country’s external reserves?

    – The second reason is that central banks obviously have to take into account profit and loss account considerations. From this standpoint, gold should provide a return just like other assets.

    But the reasons for prudent management of gold reserves by central banks are, in our view, of utmost importance.

    Central banks are typically “risk averse” when investing their foreign assets on the financial markets; as far as gold management is concerned, an even more cautious attitude is required because of the characteristics of the gold market.

    Central banks must be aware that their deposits may favour the financing of speculative gold sales. In other words, for a speculator (or a producer) who wants to take a position against gold, it would be very easy to be short because he can easily borrow from the official sector, which is a potential lender on this market. The result of this policy then would be a drop in the price of gold.
    Furthermore, lending is even more delicate for a big holder: what is the use of lending if, at the same time, you are depreciating the value of your holdings? This question is effectively not the same when you hold 3,000 tons as when you hold 300 tons.

    Consequently, our policy regarding gold lending could be expressed as follows: a responsible holder must have a responsible approach to management. This means that the Banque de France has to and does pay due attention to the trade-off between its own interests (ie enhancing the return on its assets) and the impact on the market.

    The gold market characteristics described earlier call for a cautious and coherent attitude.

    B. This Banque de France view is now widely shared by the central banking community

    1. Concerning gold holdings:

    The ECB’s decision in July 1998 to hold 15% of its reserves in gold, taken from the gold stocks of the national central banks, was generally seen as a positive signal in a market hitherto inhibited by fears that governments might decide upon new gold sales.

    This was evidence that gold remains an important element of global monetary reserves.

    2. Concerning gold selling and gold lending:

    The Banque de France and the Bundesbank have been a driving force behind the 1999 joint statement on gold, which is fully consistent with our traditional position. And I quote:

    – “The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.

    – The gold sales already decided will be achieved through a concerted programme of sales over the next 5 years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

    – The signatories of this agreement have agreed not to expand their gold lendings and the use of gold futures and options over the period.” (End quote.)

    The so-called “Washington Agreement” has clarified the intentions of the Eurosystem as well as of the Sveriges Riksbank, the Swiss National Bank and the Bank of England with respect to their gold holdings.

    First, it has re-emphasised the role of gold in stating that (I quote) “Gold will remain an important element of global monetary reserves”. Second, it has provided the market with some reassuring guidance concerning the sensitive issue of central banks’ gold sales and lending.

    Far from destabilising the market, the Washington Agreement brought more transparency to the gold market, and helped foster sounder conditions in the price formation process by reducing uncertainty and overall volatility.

    It is true, however, that the initial market reaction to the joint statement was extreme. The immediate impact of the Washington Agreement was all the more dramatic as a number of market participants (gold mines, hedge funds) had accumulated big and, I would say in some cases, excessive, short positions. The fact that the short sellers had to rapidly square their positions induced a brief period of higher volatility, but also created the conditions for a more orderly market and thus, during the last months, gold prices have fluctuated in a relatively narrow range.

    On balance, I do think that the joint statement has had a stabilising effect on the gold market thanks to enhanced transparency and clarity concerning central banks’ intentions...."


    BIS - Monetary policy frameworks and central bank market operations

    Markets Committee
    MC Compendium
    Monetary policy frameworks and central bank market operations; 2008

    The Markets Committee comprises senior officials responsible for market operations at central banks of the G10 and some of the largest non-G10 economies. Formerly known as the Committee on Gold and Foreign Exchange, it was established in 1962 following the setting-up of the so-called Gold Pool. Then, members continued to meet at the BIS for open and informal exchanges of views. Over the years, the focus of these discussions has shifted towards coverage of recent developments in financial markets, an exchange of views on possible future trends, and consideration of the short-run implications of particular current events for the functioning of these markets and central bank operations.
    The Committee also serves as a forum for central banks to discuss the specifics of their own market operations. An important feature that has been constantly highlighted by the discussions is that central banks’ decisions and actions are shaped by the frameworks in which they operate. While these monetary policy frameworks share a number of similarities across countries, there are also noticeable differences, in particular at the operational level. Monetary policy frameworks also evolve.
    To facilitate its discussions, the Markets Committee condensed the information on the monetary policy frameworks and market operations of its members into a single and easily accessible document. This “Compendium” includes information on four main aspects: monetary policy committees (or similar decision-making bodies); policy implementation; market operations; and monetary policy communication. The Committee thinks that sharing such information with market participants and the public at large could also enhance market transparency and the understanding of central bank actions. The information will be regularly updated.
    The descriptions of monetary policy frameworks presented in the Compendium have been submitted by the respective central banks and either reproduce or summarise information which is already publicly available in their publications or on their websites. The original central bank publications shall remain the ultimate references..."


    Monday, November 21, 2011

    IMF - Data Template on International Reserves and Foreign Currency Liquidity

    Data Template on International Reserves and  Foreign Currency Liquidity

    Last Updated: February 16, 2011
    This website re-disseminates IMF member countries' data on international reserves and foreign currency liquidity in a common template and in a common currency (the U.S. dollar). Historical data by country and selected topics are also available.
    As part of the efforts to strengthen the Special Data Dissemination Standard (SDDS), on March 23, 1999 the Fund's Executive Board approved the incorporation of the data template on international reserves and foreign currency liquidity into the SDDS as a prescribed component with a transition period to run through March 31 of 2000. Following the end of the transition period, SDDS-subscribing countries began disseminating the template data on a monthly basis, with no more than a one-month lag. Thus, the first set of template data for end April 2000 were disseminated by the end of May 2000.
    The data template establishes standards for the provision of information to the public on the amount and composition of official reserve assets, other foreign currency assets held by the monetary authorities and the central government, short-term foreign currency obligations, and related activities (such as financial derivatives positions and guarantees extended by the government for quasi-official and private sector borrowing) of the monetary authorities and the central government that can lead to drains on reserves and other foreign currency assets. Operational Guidelines designed to assist countries in the preparation of template data were issued in October 1999 and are accessible from this site...


     [Mrt: This led me to the template which has an interesting foot note:]

    (Common Template)
    Sample Form for Data Template on International Reserves/Foreign Currency Liquidity
    Last Updated November 01, 2010
    (Information to be disclosed by the monetary authorities and
    other central government, excluding social security) 1 2 3
    I. Official reserve assets and other foreign currency assets (approximate market value) 4

    A.   Official reserve assets     
          (1)    Foreign currency reserves (in convertible foreign currencies)     
                 (a)   Securities     
                          of which: issuer headquartered in reporting country but located abroad       
                 (b)  Total currency and deposits with:        
                       (i)   other national central banks, BIS and IMF     
                       (ii)   banks headquartered in the reporting country       
                               of which: located abroad       
                       (iii)  banks headquartered outside the reporting country     
                               of which: located in the reporting country       
          (2)    IMF reserve position     
          (3)    SDRs     
          (4)    Gold (including gold deposits and, if appropriate, gold swapped) 5      
                  —volume in millions of fine troy ounces     
          (5)    Other reserve assets (specify)       
                  —financial derivatives       
                  —loans to nonbank nonresidents       
    B.   Other foreign currency assets (specify)     
                  —securities not included in official reserve assets       
                  —deposits not included in official reserve assets     
                  —loans not included in official reserve assets       
                  —financial derivatives not included in official reserve assets       
                  —gold not included in official reserve assets       


    1. In principle, only instruments denominated and settled in foreign currency (or those whose valuation is directly dependent on the exchange rate and that are settled in foreign currency) are to be included in categories I, II, and III of the template. Financial instruments denominated in foreign currency and settled in other ways (e.g., in domestic currency or commodities) are included as memo items under Section IV.

    2. Netting of positions is allowed only if they have the same maturity, are against the same counterparty, and a master netting agreement is in place. Positions on organized exchanges could also be netted.

    3. Monetary authorities defined according to the IMF Balance of Payments Manual, Fifth Edition.

    4. In cases of large positions vis-à-vis institutions headquartered in the reporting country, in instruments other than deposits or securities, they should be reported as separate items.

    5. The valuation basis for gold assets should be disclosed; ideally this would be done by showing the volume and price.

    6. Including interest payments due within the corresponding time horizons. Foreign currency deposits held by nonresidents with central banks should also be included here. Securities referred to are those issued by the monetary authorities and the central government (excluding social security).