Venezuela to Repatriate Gold Reserves

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It would seem mosquitoes are not the only infectious kind of bug in Venezuela.

President Hugo Chávez has been bitten by the gold bug with quite dramatic consequences. As befits megalomaniac leaders, Chávez is prone to grandiose statements and acts, which the rest of the world looks at with bafflement; but his latest actions regarding the country’s gold reserves do at least have a certain logic to them.

First of all, even a farmer in his mud hut in India or Africa is aware that gold prices have gone through the roof. Everyone is jumping on the bandwagon to buy the metal as dollars and euros look less intrinsically valuable every day. Central banks are leading the charge, particularly in emerging markets with Thailand, Mexico and South Korea all making significant purchases lately, according to the FT. China and Russia both said to be amassing ever larger state deposits, arising largely from domestic sources — and hence not so visible. The most recent figures from the World Gold Council show that as a group, on a net basis, central banks bought about 208 tons of gold in the first half of this year. That is huge: since Bretton Woods ended in 1971, the largest annual net gold purchase by central banks was 276 tons in 1981. At the start of this year, only a few analysts expected full-year net purchases of even 200 tons.

Faced with such enthusiasm for gold, it is no surprise that Chávez has moved to nationalize the domestic Venezuelan gold industry. Ostensibly the move is to counter illegal mining, according to another FT article. Despite sitting on one of the largest undeveloped gold deposits in the world in the south of the country, Venezuela has struggled to develop its gold sector for decades, partly because of political uncertainty about any commercial venture in Venezuela, but also, Chavez contends, because the mining region has been overrun by illegal miners and smugglers. Although Venezuela officially produces 11 metric tons of gold a year, illegal miners extract an additional 10 to 11 tons a year, according to Chávez.

Ulterior Motives?

The president’s desire for gold also has a darker side.

According to local paper El Universal, Venezuela has accumulated some $34 billion of debt with those countries over the past 16 months. Opposition lawmaker Julio Montoya is quoted as saying, “We think that China, Russia and Brazil have asked Venezuela to transfer the reserves to guarantee the loans that the government has received in recent years. Rumors have it that Venezuelan foreign exchange reserves abroad are being moved to bankroll these debts.

Reports have also come out this week that Chávez is looking to repatriate the majority of physical gold held in New York, London and Zurich back to Caracas, largely on the basis that this metal is held in the central banks of “hostile countries that could freeze Venezuela’s assets in the event of confrontation, much as the West did with Libya’s assets this year makes you wonder what the president has in mind to be so paranoid, doesn’t it?

If he is serious about moving the majority of the 211 tons of gold (about 17,000 standard 400-ounce bars) that Venezuela holds in overseas deposits back to Caracas, it will be a mammoth undertaking. The bullion cannot conceivably be moved unless it is insured, and it will only be insured if it is moved in smaller quantities, probably up to 40 shipments no one is going to insure $12.3 billion of gold on one plane or boat. About half of the gold is held in London, some with HSBC, Barclays and Standard Chartered, but over 99 tons is in the Bank of England.

Critics have said that the Venezuelan Central Bank does not have the secure vault space to hold 211 tons in addition to the 150+ tons they are already holding. Chávez’s reply was typically cavalier: “If there isn’t enough room to store the gold in the central bank vaults, I can lend you the basement of the Miraflores presidential palace.”

Oh yes, wouldn’t you just love to get your hands on the country’s wealth, Mr. President?

–Stuart Burns

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