Questions & Answers About Our Gold Holdings

1. How much gold does the Reserve Bank hold?

Gold held by the Reserve Bank is part of Australia's official reserve assets. The value of the Reserve Bank's physical holdings at the end of each calendar month is shown on the RBA's website in Statistical Table A4 and in the media release ‘Official Reserve Assets’. To align the RBA's reporting methodology with International Monetary Fund (IMF) guidelines, from January 2015 onwards any gold that has been lent by the RBA is recorded as a forward inflow of foreign currency in the official reserves data and excluded from the RBA's physical gold holdings.

Including gold that is on loan, the RBA's gold holdings amount to 80 tonnes, with the full value of these holdings recorded as an asset on the RBA's balance sheet. The RBA has not undertaken any sales or purchases of gold in the past two decades.

Details on the reporting methodology for official reserve assets can be found in the RBA's Bulletin article ‘Reporting Australia's Foreign Reserve Holdings’.

2. Where is the Reserve Bank's gold stored?

Almost the entirety of the RBA's physical gold holdings (99.9 per cent) is stored in the United Kingdom at the Bank of England (BoE). The BoE holds the RBA's gold as bailee; legal and beneficial title to the gold remains with the RBA. A very small amount of gold is stored at the Reserve Bank's head office in Sydney.

London is the world's largest trading centre for gold. Storing gold at the BoE allows the RBA to readily access this market, as most gold market participants prefer to take delivery in London. The Bank of England provides a very secure and cost-effective storage location for central banks and other market participants. The Bank of England only accepts bars which comply with the London Bullion Market Association's (LBMA's) ‘Good Delivery’ standards.[1] The RBA's gold is held at the BoE in an ‘allocated’ account, such that individual bars (with specified bar serial numbers) are attributable to the RBA. (In an unallocated gold account, the customer does not own specific bars, but has an unsecured entitlement to a share of gold held in a ‘pool’.)

The Reserve Bank has processes in place to ensure that its specified gold bars are maintained appropriately. Inventory reconciliation – including of unique serial numbers – is undertaken periodically, or after any movements on the RBA's account. Additionally, the Reserve Bank audits its gold processes, including gold holdings at the Bank of England.

3. Does the RBA earn income from its gold?

Gains (or losses) on the RBA's gold holdings mostly arise from changes in the spot value of gold. Gold holdings (including gold that is on loan) are revalued daily by the Reserve Bank at the Australian dollar equivalent of the LBMA's 3pm fix, with revaluation gains and losses transferred to an asset revaluation reserve on the RBA's balance sheet.

Gold holdings in a vault do not accrue interest. To earn some ongoing income, the Reserve Bank may lend its gold. For more than 30 years, the RBA has participated in the gold lending market, at times lending almost all of its gold holdings (Graph 1). Over the past decade, the RBA's gold lending activity has been lower. A reduction in gold producers' hedging demands, combined with greater willingness of other investors to lend their gold, has lowered the returns available from gold lending.

Graph 1
Graph 1: RBA Gold Loans

A summary of gold lending activity is recorded in the Reserve Bank's Annual Report each year. In the early 2000s, the RBA earned approximately $15-20 million per year from gold lending. This declined sharply after 2006 due to both reduced lending activity and lower lending rates. In the 2017/18 financial year, earnings from gold loans amounted to $0.71 million.

4. How does the RBA lend gold?

Any gold lending by the Reserve Bank has been fully collateralised by high-quality and liquid securities or has had the benefit of a government guarantee of the borrower's payment obligations to the RBA.

At the inception of each loan, the Reserve Bank and its counterparty will agree the maturity date of the loan, the value of the gold to be lent and the interest rate payable to the RBA on that amount. The RBA requires the redelivery of gold it has lent to be in the form of a physical delivery of gold to the RBA's allocated account at the Bank of England (which may be effected by a book-entry transfer of serial numbered gold bars from an allocated account held at the Bank of England to the RBA's allocated account held at the Bank of England).

The interest on a gold loan is paid to the Reserve Bank in cash (usually, Australian dollars). However, the interest rate on a gold loan is not comparable to interest rates on cash.

A common way to gauge gold lending rates is to use the rates quoted on gold swaps against US dollars. Until 2015, the LBMA published Gold Forward Offered Rates (GOFO) that represented interest rates at which market participants would borrow US dollar cash in exchange for lending gold. Graph 2 shows the difference between GOFO (a secured US dollar interest rate) and the rate at which US dollar cash could be borrowed on an unsecured basis in the interbank market (LIBOR). The difference approximates the rate a market participant might expect for lending gold without receiving cash or any other form of security. As noted above, the Reserve Bank does not lend gold on an unsecured basis. Consequently, the gold lending rates derived in Graph 2 will generally exceed those available to the RBA.

Graph 2
Graph 2: Indicative 12-month Lending Rates

5. Who does the RBA lend gold to?

The commercial relationships the Reserve Bank has with participants in the gold market are confidential; the same is true of the commercial relationships used in managing other official reserve assets. The Reserve Bank's credit risk on its gold transactions is managed by only dealing with counterparties that meet strict eligibility criteria, such as minimum credit ratings from major rating agencies. Counterparties are also required to have entered into an International Swaps and Derivatives Association (ISDA) Master Agreement with the RBA.

Endnotes

Details on the LBMA's Good Delivery standard are available at <http://www.lbma.org.uk/good-delivery>. The LBMA has a list of accredited refiners, whose standards of production and assaying meet the exacting requirements set out in the LBMA's Rules. [1]