Perspectives 2020-2021 Public Sector

Citi Perspectives for the Public Sector 52 53 Conclusion While markets and economies around the world have begun to stabilize after the COVID crisis period there remains considerable uncertainty regarding the duration of the pandemic and the long-term outlook for the global economy. Moreover, real rates are now at sub-zero levels, central bank balance sheets have reached unprecedented proportions and geopolitics are more fractured than for several decades. In such an environment, as during previous crises, gold will remain an indispensable central bank reserve asset. However, gold has the potential to work harder for CBs; using innovative financial tools it can enhance portfolio returns. Citi offers a range of gold solutions to help reserve managers to manage their gold more effectively. We work closely with managers to understand their objectives and enable them to follow best practice, as well as providing insights about market dynamics and opportunities in the gold market. Case Study: Gold Accumulation Notes These notes are designed for reserve managers who want to build a gold position over time within a preferred price band while earning a yield on funding allocated for that purpose. The central bank deposits USD with Citi in an interest bearing Note, which includes a mechanism that converts the USD into gold on a monthly basis (for example) within a pre-agreed price range, essentially locking in a maximum and minimum price for the duration of the note. While the dollars are converted into gold over time, the CB would also earn a yield on the notional invested in the form of a coupon paid at maturity. Once the note matures and the investment has been fully converted into gold, the central bank has the flexibility to request the delivery of physical metal to a location of its choice e.g. BoE. These notes do not require an ISDA or credit line in order to transact. Case Study: Dual Currency Notes (DCNs) These notes allow central banks to generate higher yields than traditional deposits while managing their relative exposure to gold and other currencies. The initial investment can be made in USD (or other currencies) as well as gold, and the notes include a mechanism that converts the notional invested from gold to USD (or from USD to gold), depending on a preferred conversion strike defined at inception. If gold appreciates more that the conversion strike at maturity, then the repayment is made in USD based on the conversion strike. Effectively these notes rebalance the allocation to gold if the gold price and the value of the holdings rises above a certain target level. Alternatively, a reserve manager could make an initial investment in USD and set a target level for converting the USD into gold, and increase the gold allocation in the portfolio if prices decline below their target, while earning an attractive yield on USD. Moreover, real rates are now at sub-zero levels, central bank balance sheets have reached unprecedented proportions and geopolitics are more fractured than for several decades. In such an environment, as during previous crises, gold will remain an indispensable central bank reserve asset. However, gold has the potential to work harder for CBs; using innovative financial tools it can enhance portfolio returns. Leveraging the New Gold Rush: How to Extract Greater Value from Gold