Gold BullionIMF proposes clarifications in Central Bank gold bullion accounting mechanism

The IMF has published its first draft of the manual that specifies the regulations for central banks' reporting mechanism, included in which are the rules relating to reporting gold holdings. This is the Balance of Payments and International Investment Position Manual, sixth edition.

LONDON - For some years there has been a degree of lobbying in the gold market for increased transparency over the treatment of gold reserves, as it has been difficult from time to time to identify how much gold is out on loan as opposed to being swapped out.  The fifth edition of the manual does not elaborate on gold swaps, nor does it give any definitive treatment of gold deposits or loans, although the International Reserves and Foreign Currency liquidity: Guidelines for a Data Template ("Guidelines") does offer some clarification.  The draft of the sixth Manual addresses the issue and there is some increased transparency, but market observers will still need to comb through the figures for the devil will lie in the detail.  The IMF is inviting questions and comments on the Draft.

This is the position under the fifth Manual and the Guidelines. Essentially, when gold is swapped with to a counterparty "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"; title to the gold passes to the taker and a simultaneous transaction is effected specifying the date for the return of the metal to the lender.  The fifth edition of the Balance of Payments Manual does not make it clear how gold swaps should be treated in terms of where the gold should show up on the books.  In the Guidelines, however, there are effectively two approaches permitted.

The first is that the gold provider should record the funds received as an increase in deposits among reserve assets and take the gold out of reserve assets.  If the gold is removed from reserve assets as a result of a gold swap, it stays on the balance sheet of the gold provider as non-monetary gold, i.e. as goods rather than as a financial asset.  

This fact may clear up some of the past misunderstandings in the market.  It has been suggested from time to time that there have been underhand dealings with respect to gold as it shuffles from the "non-monetary" to "monetary" category.  It may be perfectly simple in that the change merely reflects swap activity.

Alternatively a gold provider could record both the funds and the gold as reserve assets but would also be required to record the fact that the gold should be listed as a security that has been lent and repurchased.  In either of these alternatives the opposite applies to the gold taker.

So a reading of the headline figures of a central bank's reserves will not make it immediately clear whether there is any gold out on swap or not.

Gold loan regulations are clearer.  When a monetary authority has made gold deposits with a bullion bank, which would then use it for trading purposes, the ownership effectively remains with the monetary authority in question and the gold is returned to the authority on maturity.  The fifth edition of the Manual made no mention of the treatment of loans, but the Guidelines say that "to qualify as reserve assets, gold deposits must be available on demand to the monetary authorities".

The draft of the new Manual does address the issue.  The draft embraces the above statement with respect to deposits being available upon demand to the monetary authorities and defines gold in reserve assets as comprising gold bullion (including gold bullion held in allocated gold accounts) and unallocated gold accounts with non residents that give title to claim the delivery of the gold.  These accounts are to be distinguished from accounts that are indexed to gold but that do not give title to claim delivery; these latter are classified as deposits.

The definitions are further elaborated upon:  Allocated folds accounts provide a record of title to specified gold and constitute full outright ownership of the metal (a holder of allocated gold is a secured creditor of the party storing the metal).  Unallocated accounts present a claim against the account operator to deliver gold.

Loans: If the authority deposits gold bullion in an unallocated gold account that bullion is demonetised and this change is recorded in the other changes in assets account of the monetary authority.  If that account is with a nonresident and is available on demand, a transaction in an unallocated gold account is recorded in reserve assets.  If the account is not available on demand a transaction in currency and deposits in other investment is recorded.

So far, then it does not look as if transparency has increased greatly and the minutiae of individual banks' transactions will continue to need close inspection.

Swaps: it would seem that there is an important clarification measure buried in the detail here.  The two approaches outlined above are both still offered with respect to how the gold is treated on the books, with the Manual saying that allocated and unallocated gold account with non-residents out on swap by the monetary authority for cash collateral and are either:

What is interesting, however, is that the Manual suggests that the value of allocated and unallocated gold accounts included in reserve assets and out on swap for cash collateral should be identified in the International Investment Position (IIP) to facilitate an assessment of the level of reserves adjusted for the swap activities.

So it may be hard to find, but it looks as if it will be there.

This is a first draft and is open to discussion.  Comments will be submitted to the IMF Committee on Balance of Payments statistics and discussed at its meeting in October of this year, a revised version of the Manual will then be posted on the website.