The Philippines is joining a slew of central banks that are increasing gold holdings in foreign reserves.
Sales to Bangko Sentral ng Pilipinas could reach almost 1 million fine troy ounces a year from the current 20,000 to 30,000 ounces as a new law that exempts taxes on the monetary authority’s bullion purchases from small-scale miners takes effect, according to Deputy Governor Diwa Guinigundo.
The law seeks to remedy the 99% drop in the BSP’s domestic purchases from 2010, the central bank said after the legislation was released last week. While a previous law imposing taxes on gold sales to the central bank was enacted in 2008, it was enforced only in 2011 under an administration keen to plug revenue leaks to shore up funds for state coffers.
Governments around the world have been on a gold-buying spree -- with annual net purchases totaling the second-highest on record in 2018 -- as heightened geopolitical and economic uncertainty drove them to diversify reserves, according to the World Gold Council. The trend continued in the first quarter, led by Russia and China, and now Serbia and the Philippines are jumping onto the bandwagon. That may aid prices, which have flat-lined this year even as trade tensions picked up between Washington and Beijing.
“The percentage of gold in the central bank reserves of a few emerging markets is quite small, so some building up is natural,” said Georgette Boele, senior foreign-exchange and precious metals strategist at ABN Amro Bank NV. “Some countries buy up their own production to support the sector, while others have a more reserve diversification motive. In the case of the Philippines, its goal is to support local miners.”
Small-scale producers are allowed to sell their gold only to the central bank, but they instead settled for lower prices on the black market to circumvent the taxes, Guinigundo said last week in a reply to questions from Bloomberg News.
The tax exemption was beneficial to both the miners and the BSP, which can continue buying gold with pesos, Guinigundo said. “If we use dollars to buy gold from the world market, it would simply involve a rebalance of the FX reserve composition from dollar to gold.”
The Southeast Asian nation’s last major purchase was in July 2018, when it raised its bullion holdings by 50,000 ounces to 6.36 million ounces, or about 198 tons, according to data on the International Monetary Fund’s website. That accounts for 10% of its total reserves, WGC data shows.
“For the Philippines, there would be more purchases, but I wouldn’t expect gold’s share in the reserves to reach 20%,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “It still makes sense to hold U.S. dollars because that’s the nation’s natural FX flow.”
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