A recently released audit report of the Guyana Gold Board (GGB) has recommended that Government consider exiting the trade of metal.
The report, prepared by Ram and McRae, was released this week by the Ministry of Finance.
During the period 2012-2014 which was reviewed, it was found that GGB under a different
management and Government, had managed to accumulate almost $10B in losses because of falling world prices and that fact that the entity held on to its purchased gold in hopes that prices would improve.
Prices had risen to a high of US$1,900 per ounce a few years ago. They fell to around US$1,240 this week.
The metal has been responsible for bringing in the biggest block of foreign currency earnings for the economy in recent years despite the falling prices. However, the gains to the country would be overshadowed by the GGB losses.
Ram and McRae’s report warned that the risks of continuing the existing model where GGB buys gold from dealers and miners and later resell to its overseas market as being one fraught with dangers.
Two of the biggest reasons to get out of the trade are that the trade remains vulnerable on the purchase side to collusion and overstatement of the purity of the metal it buys, and on the sale side, on price swings.
“To reduce the potential for losses on purchases, the Board would have to implement measures of controls and redundancies that would be costly and which have no revenue potential other than the protection of such revenues.”
The result for GGB, the report zeroed in, would be an increase in cost.
“To reduce the potential for losses on the sale side, since the price of gold is determined by the international market, the only option is as far as possible to match the quantity sold with the quantity purchased on a daily basis. Result: smaller gain, if any.”
In exiting the trade, the Gold Board must discontinue all purchases and sales of gold thus avoiding any risk of trading losses, or gains.
“Under this model all the costs of trading, including the purchase, holding and price risks are eliminated.”
Under this model, the Gold Board would then only be responsible for licensing traders and producers with direct export rights; publishing daily the recommended price for the purchase of gold and the exchange rate with some allowance for the location of the purchase; ensuring that licensees operate within the terms and conditions of their licence, including overseeing the export of gold; the accurate collection of royalties and taxes; and performing the function of the supervisory authority for purposes of the Anti Money Laundering and Countering the Financing of Terrorism Act.
This model was recommended in Guyana’s draft National Development Strategy released in 1997.
In fact, the document states that “it has been decided to replace the mechanism of that board with a system of licenced and bonded buyers of gold.”
The reasons advanced include the high transportation costs and royalties.
The recommendations included submission of financial statements; provision of bonds against liabilities for royalty remittances; demonstration of a programme that involves a physical presence in the interior at least part of each year; preparation of invoices for all purchases and sales of gold; tight supervision by the GGMC; formation of cooperatives to buy gold by independent gold miners; determination of maximum number of buyers by Government, subject to a minimum of 10 and reduction in royalty rate to two per cent, phased in over two years, along with 11 other changes in the fiscal regime.
In Suriname, the Central Bank of is responsible for the registration of gold that is exported and for making gold available to jewellers.
Royalties are collected by the CBvS and gold for goldsmiths is refined by the Royal Canadian Mint (Canada). From 1994 to 2002, the CBvS was the only authorised buyer of unrefined
From 1996, several entities were licensed to purchase gold on behalf of CBvS. Since 2002, the buying and export of gold has been delegated to licensed entities.
The number of licences issued has been kept at a minimum to aid in the supervision of these entities – in 2010 there were five gold buying entities with export licences and two without export licences.
In Ghana, like in Guyana, gold companies export their gold production while the Precious Minerals Marketing Company Limited (PMMC), a company owned by the Government, buys and sells gold from small miners, appoints licensed buyers and has other responsibilities in the sector. The company also operates several jewellery retail shops.
The report explained that for exports, gold is delivered to PMMC for assaying and an Assay Invoice is issued indicating the weight and purity of the gold. The gold is then sealed and secured, customs documents are prepared, and the gold is transported and delivered to the airline. Fees and commissions are received by the PMMC.
According to the report, the review revealed a number of issues, primarily in the areas of procurement and management of gold stocks.
“In our view, the losses incurred by the Board were due to the maintenance of high stocks of gold, presumably based on speculation by the Board as to the expected price movements. The Board has also failed to carry out its duties of monitoring dealers and making efforts to curb possible smuggling,” the report said.
The report also said that by its own admission, the Gold Board does not have the resources to carry out its statutory duties. And in its commercial operations the absence of a sufficiently cautious trading policy has caused it to suffer accumulated losses of over $10B from 2012 to 2014.
“Even if the gold price was to pick up in the short term the prospects of recouping the losses from existing stock are slim to impossible. The chances are reduced even further as the Gold Board is set to deal in reduced quantities even as its costs increase. Losses then are likely to become an increasing feature of the Board’s operations. This poses the question to the Government as to the role the Gold Board should play and whether it should come out of trading altogether.”
The report said that in its view, such consideration should include the role of the Bank of Guyana in the purchase and holding of gold as part of its reserves held as long term assets and as an inflation hedge.
“Indeed, the Gold Board and the Bank of Guyana may wish to engage in immediate negotiations for the Bank of Guyana to take over some of the gold currently held by the Gold Board and apply the proceeds to the overdraft held at the Bank of Guyana.”