Accounting Sleight of Hand: How A Central Bank Recently Used Its Gold Revaluation Account To Cover Losses
Posted by freedomforall 1 year ago to Economics
Excerpt:
"By selling and immediately buying back some of its gold reserves, the central bank of Curaçao and Saint Martin managed to use its gold revaluation account to offset losses in 2021. Because many other monetary authorities are currently making losses too—and there is no limit to revaluing gold against fiat money—this trick could be used the world over to heal central banks’ balance sheets.
The central bank of Curaçao and Saint Martin, circa 2010.
What is a Gold Revaluation Account?
A gold revaluation account (GRA) is an accounting item that records unrealized gains (or losses) of gold assets. When the price of gold rises, as it inevitably does in the long run, gold assets increase in value and concurrently the GRA swells. As a formula:
GRA = present gold market value – gold purchasing cost
The GRA is usually part of a central bank’s equity (net worth), while it’s not part of its capital (a narrower definition of equity)*. By their own rules, central banks can’t use their GRAs to cover general losses.
...
The central bank of Curaçao and Saint Martin (CBCS) started making losses in 2020 due to declining interest income, which accelerated in 2021. At the end of 2020, CBCS held 420,395 fine troy ounces of gold. Its equity position was NAf 1,341 million, of which its GRA accounted for NAf 1,275 million. Since the GRA makes up a large part of CBCS’s equity it was tempting to use some of it when confronted with losses.
In 2021 CBCS decided to sell and immediately buy back 2,945 ounces of gold to turn an unrealized gain into a realized gain to offset losses. The value of the gold traded was NAf 9.55 million. On page 51 of their Annual Report 2021 it shows the metal was sold and repurchased at exactly the same price, implying the trades were handled off the market.
The realized gain is the value of the gold traded (NAf 9.55 million) minus the historic purchasing price of the gold traded (NAf 352.05) times the gold weight traded (2,945 ounces)."
"By selling and immediately buying back some of its gold reserves, the central bank of Curaçao and Saint Martin managed to use its gold revaluation account to offset losses in 2021. Because many other monetary authorities are currently making losses too—and there is no limit to revaluing gold against fiat money—this trick could be used the world over to heal central banks’ balance sheets.
The central bank of Curaçao and Saint Martin, circa 2010.
What is a Gold Revaluation Account?
A gold revaluation account (GRA) is an accounting item that records unrealized gains (or losses) of gold assets. When the price of gold rises, as it inevitably does in the long run, gold assets increase in value and concurrently the GRA swells. As a formula:
GRA = present gold market value – gold purchasing cost
The GRA is usually part of a central bank’s equity (net worth), while it’s not part of its capital (a narrower definition of equity)*. By their own rules, central banks can’t use their GRAs to cover general losses.
...
The central bank of Curaçao and Saint Martin (CBCS) started making losses in 2020 due to declining interest income, which accelerated in 2021. At the end of 2020, CBCS held 420,395 fine troy ounces of gold. Its equity position was NAf 1,341 million, of which its GRA accounted for NAf 1,275 million. Since the GRA makes up a large part of CBCS’s equity it was tempting to use some of it when confronted with losses.
In 2021 CBCS decided to sell and immediately buy back 2,945 ounces of gold to turn an unrealized gain into a realized gain to offset losses. The value of the gold traded was NAf 9.55 million. On page 51 of their Annual Report 2021 it shows the metal was sold and repurchased at exactly the same price, implying the trades were handled off the market.
The realized gain is the value of the gold traded (NAf 9.55 million) minus the historic purchasing price of the gold traded (NAf 352.05) times the gold weight traded (2,945 ounces)."
