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May 25, 2017

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Gov't records huge profit on gold

The China Post -- The Central Bank of the Republic of China made over NT$430 billion in profit, at least on paper, due to skyrocketing international gold prices, George Chou (周阿定), the bank's deputy governor, told lawmakers yesterday.

Asked by ruling Kuomintang lawmaker Lo Ming-tsai (羅明才) at the Legislature's Finance Committee hearing, Chou pointed out that the bank recorded a valuation gain of US$15 billion (about NT$435 billion) over its gold holdings as international prices reached an all-time high of over US$1,500 per ounce. The bank bought its gold reserve at a price of roughly over US$300 per ounce, Chou said.

Despite the multifold profit realized on record gold prices, the bank has no plans to cash in as the gold reserves are set up to back Taiwan's currency, Chou explained. The practice is common among many central banks around the world, he added.

International gold prices fluctuated between US$250 and US$450 per ounce from 1979 to 2005 and had surged exponentially every year thereafter. Selling currency-backing gold reserves for profit could have catastrophic impact on the New Taiwan dollar, not to mention the risk that the bank might eventually see short term profits evaporate as it needs to rebuild the stockpile while gold prices continue its upward trend in the future.

The bank will not list on its books the US$15 billion unrealized surplus on its gold reserve, which will be valued according to its purchase costs.

US Bond Holdings

International gold prices surged as investors turn to alternative markets amid the recent turbulence in U.S. stock and bond markets. Standard & Poor's recently lowered its outlook for the three facilities serving U.S. stock, bond and options markets from "stable" to "negative" over doubts about Washington's ability to rein in its debt problem. It is the first time in history the financial services company has cut the outlook of the world's biggest economy.

Taiwan's central bank has extensive holdings of U.S. bonds but the bank is not in danger because the U.S. bond market remains to be the best in the world in terms of depth and scope while boasting higher rate of return compared to Europe and Japan markets, Chou said.

Questioned by KMT lawmaker Lai Shyh-bao (賴士葆), Chou admitted that as the holder of the world's fourth largest foreign reserve, Taiwan's investment in U.S. bonds is extensive, in fact so extensive that he was unable to tell lawmakers the bonds' total value yesterday. The central bank will keep track of U.S. bond prices, he said.

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