Dow Jones notes IMF plan to clarify gold loans and swaps

IMF Draft Plan Should Aid
Gold Swap Transparency: Analysts

By Lisa Yuriko Thomas
Dow Jones Newswires
Tuesday, March 27, 2007

LONDON -- The International Monetary Fund has proposed to increase transparency in the gold market by publishing statistics that reveal the amount of gold loaned and swapped into the market by central banks, analysts said
Friday.

The first draft version of the sixth edition of the IMF's Balance of Payments and International Investment Position Manual was released earlier in March. It is open to consultation and will be discussed at the IMF's meeting in October 2007.

Central banks are the largest holders of gold reserves in the world. Although they provide regular reports of their gold purchases and sales, central banks don't currently reveal how much gold is loaned and swapped.

But in a move that was a surprise to some analysts, the IMF draft offers a clarification of treatment of unallocated and allocated gold accounts as well as the definition of monetary gold, which isn't included in the fifth edition of the manual.

The moves, if adopted, are "to be welcomed for the main reason that it adds transparency," said Rhona O'Connell of GFMS Analytics in London, "which is what everyone wants."

According to the IMF draft, gold bullion can be a financial asset, otherwise called monetary gold, or a good, otherwise known as nonmonetary gold, depending on the holder and the motive for holding.

"Monetary gold is gold to which the monetary authorities have title and is held as reserve assets," the IMF said, and comprises gold bullion and unallocated gold accounts.

Meanwhile, an allocated gold account provides a record of title to specified gold, typically offering the purchasing and selling of investment grade bars and coins to order, the draft said. "In contrast, unallocated accounts represent a claim against the account operator to deliver gold," the draft continued.

Both of these accounts are to be distinguished from accounts that are linked to gold -- accounts indexed to gold -- which are considered deposits, the draft said.

If the IMF chooses to adopt these details, it will help to "get rid of confusion, disseminate more information, and increase transparency of the marketplace," said Neil Ryan of Blanchard and Co. in New Orleans.

Ryan said that as the IMF begins implementing changes to gold-reserve accounting regulations, the gold market will become "more accessible and transparent for all market participants."

The IMF draft also proposes further clarification with regard to the treatment of loans involved in repos and gold swaps -- in other words, helping to clarify where gold should be allocated on the books.

This contrasts sharply with the IMF's previous decision to report gold held in monetary reserves, both swaps and loans, all in one line item, analysts said.

A gold swap is a repurchase agreement for currency.

With regard to gold swaps between a monetary authority and a resident, "it is reported under repo loans in other foreign currency liabilities," according to the draft.

And "any loan liability to a nonresident is recorded within 'other investment,' with the foreign exchange received recorded as an increase in currency and deposits within reserve assets," the draft continued.

As for gold loan regulations, the IMF draft said that "to qualify as reserve assets, gold accounts must be available upon demand to the monetary authorities."

In effect, this means that when gold is deposited with a bullion bank, the ownership effectively remains with the monetary authority and the gold is returned to the authority on maturity, said analysts.

The draft continues to elaborate on loans, saying, "If the monetary authority deposits gold bullion in an unallocated gold account, the gold bullion is demonetized and this is recorded in the other changes in assets account of the monetary authority."

And "if the account is with a non-resident and is available on demand, a transaction in an unallocated gold account is recorded in reserve assets," the draft continues.

Analysts maintain, however, that this is only a draft proposal and the market will have to wait and see if it is adopted in October.

But the outlook is good if such clarifications are adopted. "We'll have to work to find out how much is loaned and swapped into markets, but for the first time ever, the market will be able to actually get this information with some work," said Ryan.

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