[In This Economy] Why Filipinos shouldn’t panic over the sale of gold reserves

This week, there was too much discussion online about something that shouldn’t have been an issue to begin with: gold.

You see, Esquire Philippines came out with a piece reporting that for the first half of 2024, the Philippines turned out to be the country selling the most gold reserves. We sold nearly 25 tons, reducing the Bangko Sentral ng Pilipinas’ gold reserves by 15.7% from last year. In far second place came Thailand, which sold 9.64 tons, and in third place was Uzbekistan at 6.22 tons.

Almost instantly, this piece sent many people into a tizzy. Many spun conspiracy theories. Said someone on Facebook, “May God Help Us Filipinos… this is extreme corruption in front of our very own eyes!” Another said, “They’re selling the philippines [sic] right under our nose!!!” Yet another said, “The money of many, only enjoys [sic] by the few. Corrupt politicians. Doomed country. We are bound to doomed [sic] if this continues.”

The fact of the matter is, this is a non-issue.

First things first: central banks like the BSP typically hold some gold as part of their gross international reserves or GIR. International reserves are basically cash and assets that can be quickly converted into cash that we can use if we urgently need international currencies (typically US dollars) to pay for our debts, import bills, or other foreign obligations. In economics jargon, GIR is a buffer for “external shocks.”

Gold is but a small fraction of the Philippines’ total GIR, as you can see in Figure 1 below. As of August 2024, we currently have nearly $110 billion in reserves, and less than 10% of that is in gold. More than 85% of our reserves are in the form of foreign investments.

Figure 1.

Profit motive

Prompted by the controversy online, the BSP would later confirm in a press release that they did sell gold in the first half of 2024, “as part of [their] active management strategy of the country’s gold reserves.”

They added: “The BSP took advantage of the higher prices of gold in the market and generated additional income without compromising the primary objectives for holding gold, which are insurance and safety.”

This makes a lot of sense if you look at the recent trend in global gold prices (Figure 2). In recent days, it’s been reaching a record high. One major reason for this is the recent announcement of Jerome Powell, chairman of the US Federal Reserve or Fed, that they reduced the Fed’s key policy interest rate for the first time in four years.

This is important because the Fed’s policy rate orchestrates the interest rates not just in the US, but also internationally. If interest rates decline worldwide, this reduces the attractiveness of putting money into interest-bearing assets. Conversely, this increases the attractiveness of putting money into non-interest-bearing assets like gold. Hence, the recent surge in gold demand.

Possibly, another reason for the greater demand for gold has to do with the fact that prices may accelerate in the future because of the present monetary easing. Gold is typically seen as a hedge against inflation: because of its short supply globally, it has an intrinsic value that does not easily go down even if overall inflation rises.

Figure 2. Source: goldprice.org.

The greater demand for gold worldwide has pushed up gold prices, and as the BSP explained, they sold gold merely to take advantage of this price surge. In their own words, “The BSP took advantage of the higher prices of gold in the market and generated additional income without compromising the primary objectives for holding gold, which are insurance and safety.”

If gold prices are rising fast, why did the BSP sell so much gold? Shouldn’t it have kept gold first before selling?

But selling gold now allows the BSP to increase its net profits, and this helps to make up for the 60% decline in their net income in 2023.

If you don’t know yet, the BSP regularly buys and sells securities in the financial markets, and is also motivated to seek profits. In normal times, all the BSP’s net income gets added to its capital. But in 2023, thanks to the Maharlika Investment Fund, the BSP was forced to surrender its net income in the next two years for the benefit of Maharlika (the BSP’s contribution must not exceed P50 billion).

I have a feeling that if the BSP were not roped in for Maharlika, it would not even need to raise money from the recent gold price hike.

But at any rate, despite the recent sale of 25 tons of gold, we have enough dollars and dollar assets to go around. That’s the whole point of strategic asset management: selling just the right amount of gold, enough to make profits but not enough to deplete our gold reserves.

Figure 1 shows that our total gross international reserves grew by 8.3% from August 2023 to August 2024. Total reserves are also equivalent to about 7.8 months of imports, higher than the “adequate” level which is just three months. Finally, the value of reserves held in gold dropped from August 2023 to August 2024 by a negligible 0.1% despite the recent 25-ton sale.

All this means that we have nothing at all to worry about when it comes to the economic health of the Philippines. We are very far from a situation where we’ll run out of dollars.

The country’s external position now is so much more robust compared to, say, the Martial Law era, where we saw successive currency and balance-of-payments crises. I should know, because I teach both macroeconomics and Martial Law economics at UPSE this semester.

Our wealth is not in gold

The broader point to make is that, contrary to popular belief, gold is not the main source or form of the Philippines’ total wealth. In other words, the country’s wealth lies not in gold.

Instead, our wealth as a nation is the sum total of all the things around us (from our natural resources, physical infrastructure, and everything in between), and also inside us (the value of “human capital” including our education and health).

This wealth grows based on our ability to produce goods and services yearly, as captured by gross domestic product (GDP). Fast GDP growth means that our nation’s wealth grows fast.

I totally get people’s fascination with gold, though. Humans have had a long history with gold, and for a long time the world’s monies used to be backed by gold — the system we call the “gold standard.” Central banks also used to hold so much more gold than today.

But remember this: the Philippines’ riches are not in our gold supplies (which are puny despite our local gold mining operations), but in all the resources around us, and our ability to produce goods and services in the future.

It so happens that gold is also heavily associated with the Marcos family, which, for a long time, teased the public by saying that they amassed huge hoards of gold, thanks to Ferdinand E. Marcos. But the Marcoses do not have any control over the BSP’s gold reserves. The BSP is very much an independent institution — unlike the old Central Bank, which was beholden to Ferdinand E. Marcos.

Finally, let me say that there are tons of other stuff that Filipinos ought to worry about so much more than gold.

These include the recent railroading of the 2025 budget bill in the House of Representatives, the ballooning of unprogrammed funds and confidential funds in the national budget, the P90-billion transfer of funds from PhilHealth to the public coffers, the P125 billion of ill-gotten wealth the Marcoses have yet to return, the P203.8 billion of unpaid tax liabilities the Marcoses have yet to pay, and the country’s 90% learning poverty rate.

We will all do well to worry about these instead. – Rappler.com

JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. In 2024, he received The Outstanding Young Men (TOYM) Award for economics. Follow him on Instagram (@jcpunongbayan) and Usapang Econ Podcast.