How a Central Bank in the Caribbean Recently Used Its Gold Revaluation Account to Cover Losses
Caribbean Central Bank Uses Gold Revaluation to Cover Losses
How innovative central banking strategies could reshape global monetary policy through gold revaluation accounts
Introduction
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 innovative strategy could be used worldwide to heal central banks' balance sheets.
This groundbreaking case study demonstrates how central banks can leverage their gold holdings to maintain financial stability during challenging economic periods. As gold prices continue their long-term upward trajectory, the size of these revaluation accounts grows, providing increasingly powerful tools for monetary authorities.
Understanding this mechanism is crucial for investors who invest in gold as a hedge against monetary instability. The implications extend far beyond one small Caribbean nation, potentially offering a template for central banks worldwide facing similar challenges.
Table of Contents
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.
Accounting Structure
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 traditionally can't use their GRAs to cover general losses.
Price Sensitivity
If gold prices rise, gold assets and the GRA increase; if gold prices fall, gold assets and the GRA decrease. Central banks that bought gold decades ago have substantial GRAs.
Balance Sheet Impact
Central bank losses eat into their capital, possibly pushing it into negative equity. While central banks can operate under negative equity, it can interfere with monetary policy and deteriorate independence and credibility.
Infinite Potential
The size of GRAs is theoretically infinite because gold is the only universally accepted financial asset that can't be printed. There's no limit on gold's price in fiat currency terms.
The Credibility Factor
When a central bank's credibility is lost, all is lost. Hence central banks prefer to have a healthy capital position. A slippery slope develops when credibility deteriorates due to persistent losses or negative equity positions.
The concept gained renewed attention when Dutch central bank Governor Klaas Knot mentioned their GRA as a solvency backstop in October 2022, stating: "The balance sheet of the Dutch central bank is solid because we also have gold reserves and the gold revaluation account is more than 20 billion euros, which we may not count as capital, but it is there."
For investors tracking precious metals markets, understanding GRAs helps explain the strategic importance central banks place on gold holdings. This creates additional fundamental demand that supports long-term price appreciation for those who purchase gold as an investment.
Background: Central Bank of Curaçao and Saint Martin
Curaçao and Saint Martin are two small islands in the Caribbean, both part of the Kingdom of the Netherlands. Because these countries are not included in the eurozone they have their own currency: the Netherlands Antillean guilder (local symbol NAf, international code ANG).
CBCS Financial Position (End of 2020)
Gold Holdings
Equity Position
The central bank of Curaçao and Saint Martin (CBCS) started making losses in 2020 due to declining interest income, which accelerated in 2021. Since the GRA made up such a large portion (95%) of CBCS's equity, it was tempting to use some of it when confronted with mounting losses.
Why This Matters
CBCS's situation illustrates how central banks with significant gold holdings acquired at low historical prices face a unique opportunity. Their total equity becomes highly correlated to gold price movements due to relatively large GRAs built up over decades.
The Challenge
- Operating losses in 2020-2021
- Declining interest income
- Need to maintain capital adequacy
- Preserve central bank credibility
The Opportunity
- Massive GRA built up over decades
- Gold purchased at NAf 352/oz historically
- Substantial unrealized gains available
- Potential regulatory workaround
How the Gold Revaluation Mechanism Worked
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, and the transactions were handled off the market at exactly the same price.
The Transaction Process
Identify Available Gains
CBCS calculated the difference between historical cost (NAf 352.05/oz) and current market value for a portion of their gold holdings.
Execute Simultaneous Transactions
Sold 2,945 ounces at market price and immediately repurchased the same amount at the same price off-market.
Realize the Gain
The sale converted unrealized appreciation into realized gain of NAf 8.51 million that could be used to offset operating losses.
Maintain Gold Holdings
Total gold holdings remained unchanged at 420,395 ounces, but the cost basis increased, reducing the GRA by the same amount.
NAf 9.55 million - (NAf 352.05 × 2,945 ounces) = NAf 8.51 million
Clever Accounting
The genius of this approach is that CBCS's total gold holdings didn't change. The cost for the gold transactions was that the historic purchasing cost of CBCS's total gold reserves went up by NAf 8.51 million, which reduced the GRA by the same amount—essentially converting unrealized gains into usable realized gains.
Step-by-Step Transaction Breakdown
Understanding the detailed mechanics of how CBCS executed this strategy reveals the sophistication of modern central banking accounting and the potential for similar applications worldwide.
| Transaction Element | Before Transaction | After Transaction | Net Effect |
|---|---|---|---|
| Gold Holdings (ounces) | 420,395 | 420,395 | No change |
| Average Cost Basis (NAf/oz) | 352.05 | 372.30 | +NAf 20.25 |
| Total Historic Cost | NAf 148.0 million | NAf 156.5 million | +NAf 8.51 million |
| Gold Revaluation Account | NAf 1,275 million | NAf 1,267 million | -NAf 8.51 million |
| Realized Gain Available | NAf 0 | NAf 8.51 million | +NAf 8.51 million |
Legal Compliance
The transaction complied with central banking regulations because it involved actual sale and repurchase, creating legitimate realized gains rather than accounting manipulation.
Market Impact
By conducting the transactions off-market at identical prices, CBCS avoided any impact on gold market prices while achieving their accounting objectives.
Precedent Setting
This approach establishes a template that other central banks could potentially follow when facing similar balance sheet challenges.
Investor Implications
The strategy demonstrates the hidden value in central bank gold holdings and supports the long-term investment case for gold ownership.
Key Insight
The average purchasing price of CBCS's gold reserves jumped from NAf 352.05 per ounce on December 31, 2020, to NAf 372.3 on December 31, 2021. The difference (NAf 20) times CBCS's total gold holdings (420,395 ounces) equals NAf 8.51 million—exactly the amount CBCS extracted from its GRA.
Implications for Central Banks Worldwide
The CBCS case study has profound implications for central banks worldwide, particularly those holding significant gold reserves acquired at historically low prices during the Bretton Woods era when gold was fixed at $35 per ounce.
European Central Banks
Banks like the Bundesbank and Dutch National Bank hold substantial gold reserves acquired decades ago at $35/ounce:
- Massive unrealized gains available
- Potential to cover QE-related losses
- Alternative to taxpayer recapitalization
- Maintains central bank independence
Federal Reserve System
The Fed's gold holdings could provide similar flexibility:
- 8,133 tonnes of gold reserves
- Historic cost basis of $42.22/ounce
- Potential revaluation gains in hundreds of billions
- Tool for future crisis management
Emerging Market Central Banks
Recent gold buyers could benefit from appreciation:
- China, Russia, Turkey active buyers
- Building GRAs for future flexibility
- Reducing dependence on foreign currencies
- Creating policy space for crisis response
Risk Considerations
One reason GRAs are traditionally prohibited from being used to absorb losses is because once fully run down, a declining gold price could cause GRAs to become negative, damaging central banks' equity. However, for central banks that bought gold at $35/ounce, this risk is virtually immaterial—gold prices will never again fall to those levels.
The broader implications extend beyond individual central bank balance sheets to the international monetary system itself. As noted in previous analysis, the international monetary system could be deleveraged and stabilized by substantially higher gold prices. More gold value on central bank balance sheets increases the ratio of hard assets against international credit assets and liabilities.
Debt Monetization Potential
Bigger GRAs could theoretically be used to cancel domestic government bonds on central bank balance sheets, potentially alleviating sovereign debt burdens through gold revaluation.
Monetary System Stability
Higher gold valuations increase the hard asset foundation of the global monetary system, potentially reducing systemic risks from excessive credit creation.
Central Bank Independence
Access to GRAs provides central banks alternatives to taxpayer recapitalization, preserving independence and credibility during crisis periods.
What This Means for Gold Investors
The CBCS case study provides compelling evidence for the strategic value central banks place on gold holdings, offering several important insights for private investors considering gold as part of their portfolios.
Fundamental Demand Support
Central banks' increasing reliance on gold for balance sheet management creates structural demand that supports long-term price appreciation for investors who purchase gold.
Unlimited Price Potential
As the analysis notes, "there is no limit on the price of gold" in fiat currency terms. This unlimited revaluation potential makes gold unique among financial assets.
Crisis Hedge Validation
The strategy demonstrates gold's role as the ultimate crisis hedge, providing central banks with tools to maintain stability during economic turbulence.
Portfolio Insurance
For private investors, gold serves a similar function as central bank GRAs—providing portfolio insurance that can offset losses in other assets during crisis periods.
Investment Implications
The size of GRAs is infinite because gold is the only universally accepted financial asset that can't be printed. Denominated in currencies issued by central banks, there is no theoretical limit on gold's price, and consequently the size of potential revaluation gains. This makes gold particularly attractive for investors concerned about currency debasement and monetary system stability.
| Investment Factor | Central Bank Perspective | Private Investor Parallel |
|---|---|---|
| Balance Sheet Protection | GRAs offset operational losses | Gold hedges portfolio volatility |
| Crisis Management | Maintains credibility during stress | Preserves wealth during market crashes |
| Independence | Reduces reliance on taxpayer bailouts | Reduces dependence on financial system |
| Long-term Value | Appreciates against all fiat currencies | Protects against currency debasement |
| Liquidity | Can be monetized when needed | Highly liquid global market |
For investors tracking gold price movements, the CBCS strategy validates gold's unique position in the global financial system. Central banks worldwide may increasingly view their gold reserves not just as crisis insurance, but as active tools for balance sheet management and monetary policy implementation.
Strategic Accumulation
Following central bank strategies:
- Regular gold accumulation programs
- Dollar-cost averaging approach
- Physical possession priority
- Long-term hold strategy
Consider how to build gold positions systematically.
Portfolio Allocation
Learning from central bank practices:
- 5-20% portfolio allocation common
- Crisis insurance perspective
- Uncorrelated asset benefits
- Wealth preservation focus
Conclusion
The innovative strategy employed by the Central Bank of Curaçao and Saint Martin represents a potential paradigm shift in central banking practice. By converting unrealized gold appreciation into realized gains that could offset operational losses, CBCS demonstrated how gold revaluation accounts can serve as powerful tools for maintaining central bank stability and credibility.
This case study has profound implications that extend far beyond one small Caribbean nation. Central banks worldwide, particularly those holding substantial gold reserves acquired at historically low prices, now have a template for accessing the massive unrealized gains in their portfolios without selling their strategic gold holdings.
Looking Forward
As the German Bundesbank Governor noted in 2018, gold serves as "the bedrock of stability for the international monetary system." The CBCS strategy validates this perspective while providing a practical mechanism for translating gold's strategic value into operational flexibility. For central banks facing losses from quantitative easing policies and rising interest rates, gold revaluation represents an alternative to taxpayer recapitalization.
For private investors, this development reinforces gold's unique position as the only financial asset that cannot be printed or devalued through monetary policy. The unlimited potential for revaluation in fiat currency terms, combined with central banks' increasing recognition of gold's balance sheet utility, creates a compelling fundamental backdrop for gold price appreciation.
Whether you're a central banker managing a national balance sheet or an individual investor protecting personal wealth, the CBCS strategy demonstrates gold's enduring role as the ultimate financial anchor in an increasingly unstable monetary system. As more central banks potentially adopt similar approaches, the strategic importance of gold in global finance will only continue to grow, supporting the long-term investment case for those who include gold in their portfolios.