St. LOUIS (ResourceInvestor.com) -- This week, the International Monetary Fund (IMF) posted its first draft of the sixth edition to the “Balance of Payments and International Investment Position Manual.” Among the revisions were accounting changes for gold loans, which are not publicly disclosed at present, stating that all gold loans should be broken out into their own category to avoid double-counting of reserves.
The IMF’s Balance of Payments Manual governs the accounting and reporting functions of central banks through a set of rules and regulations. The manual regulates how reporting should be handled across a large spectrum of issues, which includes gold swaps and loans.
In January, the IMF first reported that it was reviewing possible accounting changes for recording gold loans after the Reserves Assets Technical Expert Group (RESTEG) recommended at the “Nineteenth Meeting of the IMF Committee on Balance of Payments Statistics” that unallocated gold accounts held with bullion banks should be excluded from reserve assets.
According to “Chapter 6: Functional Categories” of the new manual, allocated and unallocated gold accounts are to be distinguished from accounts that are linked to gold but do not give title to claim delivery of gold. Unallocated gold are to be classified as currency and deposits.
If gold loaned is available on demand, or allocated, the transaction is recorded in reserve assets. If the gold is not available on demand, or unallocated, the transaction is classified as other investment, currency and deposits, “thereby preventing double counting.”
“This is the last component of the gold market that was always left up to estimates,” said Neal Ryan, Vice President and Director of Economic Research at Blanchard & Co. “All depends on what the data ends up saying, but the last great debate in the gold market could be coming to a close as all participants have a level playing field because of this information.”
Ryan told RI that nearly 99% of all gold lending is made from unallocated accounts.
“So rather than it all being lumped into one line item in the IMF reserve position, you'll not only be able to see the countries own breakout on gold they make available to the lending market, but you'll actually be able to see how much is loaned out from the unallocated account at any given time,” he said. “This is leaps and bounds past what is currently available information to the market.”
In its latest “Gold Yearbook,” CPM Group recently estimated gold loaned volumes at volumes at 50-75 million ounces. The consultancy noted a pull-back in gold leased and swapped in the market by central banks from volumes of 100 million ounces during the early 2000s.
Virtual Metals, publisher of “The Yellow Book,” puts the figure a bit higher at perhaps 90 million ounces.
GFMS, soon to release its “Gold Survey 2007,” previously estimated that end-2005 there was about 95 million ounces of loaned gold in the market from central banks.
Philip Klapwijk, chairman of GFMS, told RI that the volume of gold loaned “declined quite sharply in 2006,” but he could not give a definitive estimate for end-2006 prior to release of the study. He remained skeptical regarding any impact the new accounting changes could have on the market.
“I'm not sure that the proposed changes in the IMF manual will aid transparency,” he added.
Klapwijk said the new accounting changes could actually confuse things further in the market, “unless the central banks can be persuaded to distinguish sales from lending.”
“Some will and many will not,” he said, adding that “many will simply not be prepared” to show what they are lending.
Matthew Turner, analyst for Virtual Metals, told RI that he did not see the proposed accounting changes having much impact on the market either.
“I think it will show that the estimates, whether 90 million ounces or 50 million ounces or somewhere in between, are right, and I think those estimates are what the market believes,” he said.
Jon Nadler, analysts for Kitco.com, said central banks are selling less gold and lending less gold, and “this is not a harbinger of a mega-bull market phase.”
“Most of the gold that central banks had been lending has been sold. The demand for borrowed gold is also down. Project finance no longer uses borrowed gold as a source of funding. Private sector lenders are stepping up and filling any void,” he said.
He agreed that the changes will have no effect on the gold market, “not in price, not in terms of perception.”
The IMF is accepting comments on the current draft until 15 June 2007. These comments will then be submitted to the members of the IMF Committee on Balance of Payments Statistics and discussed at its meeting of October 2007.
Conny Lotze, spokesperson for IMF, told Resource Investor that the final manual will most-likely be published in early 2008, possibly implemented by the start of 2009.
