Party Like It's MTM Time

IMG Auteur
Published : January 09th, 2012
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Category : Editorials





The ECB published its "Year of the RPG" year-end quarterly revaluation ConFinStat yesterday, and the trend continues. Here are the relevant results:

In the week ending 30 December 2011 the increase of EUR 3.6 billion in gold and gold receivables (asset item 1) reflected quarterly revaluation adjustments, as well as the sale of gold coin by one Eurosystem central bank.

Quarter-end revaluation of the Eurosystem’s assets and liabilities

In line with the Eurosystem’s harmonised accounting rules, gold, foreign exchange, securities holdings and financial instruments of the Eurosystem are revalued at market rates and prices as at the end of each quarter. The net impact of the revaluation on each balance sheet item as at 31 December 2011 is shown in the additional column “Difference compared with last week due to quarter-end adjustments”. The gold price and the principal exchange rates used for the revaluation of balances were as follows:

Gold: EUR 1,216.864 per fine oz.

USD: 1.2939 per EUR

JPY: 100.20 per EUR

Special drawing rights: EUR 1.1867 per SDR


As I noted
here last Friday, during the dark of Thursday night, euro gold mysteriously levitated itself up a whopping €32.89 from Thursday's London PM fix of €1,184.16, which would have been a disappointing decline since the October MTM Party which marked gold at €1,206.39. This, of course, begs the question (once again) that was implied in this post as to how important "Snapshot Day" really is to young central bankers. (Evidence from Sept. '10 and April '11 seems to suggest that year-end and mid-year might be more important than the other two quarters.)

But this is neither here nor there which is why I put it in a silly little sidebar. It is simply a curious observation.

Sidebar #2

It is funny to see how pathetically little some in the euro-skeptical media really understand about the Eurosystem. Here's the Wall Street Journal's Marketwatch headline relating to yesterday's MTM Party:

ECB balance sheet grows, gold reserves increase

The flaw in the headline is compounded in the body of the article:

"The value of the Eurosystem's gold and gold receivables holdings increased by EUR3.6 billion to reflect quarterly revaluations as well as the sale of gold to the ECB by another euro-zone central bank, the ECB said."

First of all, that's not what the ECB said. This reporter's statement that one of the NCBs (National CBs) sold gold to the ECB carries obvious implications which are not only wrong, but very misleading. Someone in Europe emailed me last night asking:

"Did you notice that one European CB sold gold to the ECB? My guess is it was Italy."

Someone else posted this comment on a forum after reading that article:

"Gold of a Eurozone CB sold to ECB ... If I am not mistaken-correct me if I'm wrong-this does not happen very often?

More gold on ECB balance sheet in exchange for buyout sovereign debt perhaps ...?"

Here are the problems with that article. The ECB is simply the core of the Eurosystem. Actually, there are two systems. The ESCB or the 'European System of Central Banks' which is comprised of all the CBs in the EU, even those not using the euro as their currency. And then there's the Eurosystem which is comprised of all the CBs using the euro, with the ECB at its operational core.

The ConFinStat, put out weekly with quarterly MTM revaluation, is the balance sheet of the whole Eurosystem which includes all of the NCBs using the euro. It is not the balance sheet of the ECB. If you'd like to see the ECB's balance sheet, you can find it in the Annual Report for the ESCB and the Eurosystem which is published every year at the end of the first quarter to be presented to the European Council, Parliament and Commission. In last year's report, which can be found
here, the ECB's balance sheet appears on page 214.

The actual ECB balance sheet includes 16,122,143 ounces, or 501.5 tonnes of gold which was valued at €17B as of December 31, 2010. That gold comes from the "foreign reserve asset" capital subscription to the Eurosystem by the NCB's of which at least 15% of the subscription fee had to be in gold. And the amount of each member country's fee is based on a “capital subscription key” which reflects the respective country’s share in the total population and GDP of the EU. These two determinants (population and GDP share) have equal weighting. The ECB adjusts the shares every five years and whenever a new country joins the EU.

The ECB marks its 501.5 tonnes of gold to the market price each year, but the unrealized gain from the revaluation goes into a special "Revaluation Account" which is credited to the NCB's according to the subscription key. In other words, the NCB's own the ECB, use it as their system's operational core, and benefit directly from the revaluation of their share of the ECB's assets including its gold.

So hopefully you can see why it makes no sense whatsoever that, as the Marketwatch article says, a euro-zone central bank would sell gold to the ECB. And even if gold had been transferred from an NCB to the ECB, it wouldn't show up as a change on the consolidated balance sheet referred to in that article!

Furthermore, the amount of gold *coins* that one of the NCBs sold last week was all of €1 million. What's that, 820 coins? Most likely it was simply a net sale of gold coins to the public.

Finally, try a Google search of the first part of that Marketwatch headline, "ECB balance sheet grows", and you'll see just how many analysts are incorrectly referring to the Eurosystem's balance sheet as if it belongs to the ECB. And if you can't quite see how this seemingly-innocuous incorrect view is detrimental to the usefulness of one's analysis, just ask Texan any question you want to about the ECB.
(j/k Texan ;)



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