SOFAZ’s “Gold Policy”?

SOFAZ’s “Gold Policy”?

CESD; “SOFAZ too late with investing in gold”

The State Oil Fund of the Azerbaijan Republic (SOFAZ) reported that the fund has started to invest in gold in order to diversify its portfolio and increase revenue. According to the Oil Fund’s Investment Policy, 5% of the investment portfolio’s total value in 2012 can be invested in gold.  To this end, from 1 February 2012, the fund began to purchase gold bullion from market-maker banks of the London Bullion Market Association.

CESD Analysts mentioned that SOFAZ delayed making decision to invest in gold. The center offered transferring 20 % of assets of SOFAZ in gold in 2008 when global financial crisis started. SOFAZ did not make decision to invest in gold that time due to weak of investment policy of the fund. Price of gold increased 1,5 times after global financial crisis started. Last year, gold price increased 25,6 % although there was fall in the gold market in last 6 months; price decreased 1,6 %. SOFAZ was too late with investing in gold although it should have been done before when CESD recommended.

Experts said that changes in SOFAZ strategy such as investing in gold or assets of foreign managers will not increase SOFAZ returns. The strategy must clearly delineate the share and dynamics of national consumption, public investments, government expenditures and trade with other countries with the hydrocarbon resources deducted and oil money added to the national assets. A good strategy will measure and use the oil money not for separate consumption expenditures or investment projects, but in line with all public spending, while accumulating and saving that oil money separately. The diversification principle need to be prepared to illustrate the ceilings expressed in percentages of the Fund’s resources can be allocated in each country, in each currency, each type of the business, and each company, as well as ceilings expressed in percentages of the invested company’s assets.

CESD Analysts added that the existing policy framework and execution have clearly failed and a new one needs to be designed and implemented to ensure the efficient management of oil revenues. The technical challenge is to create the scheme such that the amounts withdrawn during the resource exploitation phase and the post-resource financial return phase are the same.  However, the details of the Permanent Income scheme have not yet been worked out and agreed to and it has not been implemented.  Thus, the pressure on SOFAZ to relinquish funds continues and intensifies. One of the difficult elements of the Permanent Income approach is that in order to determine the current levels of withdrawals, the value of the stock of oil in the ground must be known, and therefore knowledge of the future profile of oil prices until the resource is exhausted is necessary.  To date, this calculation has been based on “expected” or historical averages of oil prices, and several scenarios have been posited.  As the recent past has shown, oil prices can be extremely volatile and relatively unpredictable.

© CESD, 2012


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