▶ Where is Venezuela's 366 tonnes of gold?
▶ Does Venezuela still control and own unencumbered it’s own gold reserves?
▶ Bank of America economist on visit to Venezuelan central bank last week was allowed to view the bank's gold vault and the gold repatriated by President Hugo Chavez
▶ Is any of the country's gold encumbered, loaned or leased to Goldman Sachs or other banks?
▶ Is there a possibility of this given the Venezuelan economy's weak position?
▶ An arbitration court of the World Bank ruled that Venezuela needs to immediately repay $740 million to US mining company 'Gold Reserve'.
▶ Repayment is connected to Venezuela having terminated Gold Reserve's gold and copper mining project in 2009 as part of Chavez's nationalisation of energy and mining projects
▶ This ruling could set a precedent for other companies to seek compensation from Venezuelan government during a time in which Venezuelan economy is weak and heavily indebted
▶Venezuela's international credit ratings will now be in an even worse state, as will its international bond servicing situation
▶Chinese have also lent to Venezuela in return for ongoing deliveries of oil. Could Venezuela now need to mobilise more of its gold again to help finance its debts? Will China seek to use its considerable financial and economic power to build a stronger economic and political relationship with Venezuela?
▶ The confiscation also highlights the risks to precious metals mining companies operating in politically unstable countries and the stock specific risk of investing in mining shares
Venezuela's gold reserves are back in focus after Francisco Rodríguez, a Bank of America economist, revealed in a client note yesterday that while on a visit to the Central Bank of Venezuela last week, his party was given a tour of the central bank's underground gold vault in Caracas and allowed to view the bank's considerable gold holdings.
This includes the sizeable quantities of Venezuela's gold reserves that were very publically repatriated back to Caracas by President Chavez in 2011 and 2012.
Rodríguez covers the economies of Venezuela, Columbia and Peru on behalf of Bank of America Merrill Lynch (BAML), and is a native of Venezuela, having also previously been head of Venezuela's Congressional Budget Office.
Rodríguez was in Caracas last week for meetings with government and central bank officials including Nelson Merentes, the president of the country's central bank, the Banco Central de Venezuela (BCV).
According to the latest figures published by the World Gold Council (WGC), Venezuela holds 367.6 tonnes of gold in its reserves, representing 70.6% of its official reserves of foreign exchange and gold.
At current market prices, the official gold holdings are worth nearly $14.5 billion. Venezuela is one of the few large holders of gold whose gold holdings represent such a high percentage of total foreign exchange and gold reserves, the other countries being the US, Germany, Italy, France and Portugal.
Unlike the US, Germany and Italy, and possibly Portugal, Venezuela actually has the majority of its gold in its own vaults and not stored abroad. As to whether any of Venezuela's gold reserves are leased, loaned, collateralised or otherwise encumbered is another question.
In August 2011, the Venezuelan government surprised the gold market when it announced that it would seek to repatriate, at short notice, 160 tonnes of its foreign held gold reserves back to Venezuela for safekeeping. The government also revealed at that time where its gold was located and in what form it was held.
Celebrations as Venezuela’s gold is repatriated to Caracas in 2011
Of the 366 tonnes held at that time, 154 tonnes was already stored in Venezuela, 99 tonnes were in custody at the Bank of England, 12 tonnes in custody with the Bank of International Settlements, and 17 tonnes in custody with JP Morgan. Another 82 tonnes of gold was held in term deposits with a group of bullion banks consisting of HSBC, Barclays, Standard Chartered, the Bank of Nova Scotia and BNP Paribas.
Gold on term deposit earns interest for the central bank but the bullion banks that either accepted the original deposit or took over an existing term deposit would likely have sold or lent the gold in the market. Yet, they would be obliged to return the same amount of gold when the Venezuelans requested that it be repatriated.
The Venezuelan significant repatriation request, in the summer of 2011 may have been a contributing factor to gold's strong price appreciation at that time, as market participants were forced to find 160 tonnes of physical gold bullion at short notice.
The 160 tonnes of gold was transported back to Caracas with much fanfare in a series of flights from late 2011 to early 2012, with the last flight carrying 14 tonnes of gold from Paris. The fact that this gold was sourced in Paris suggests the possibility that it was sourced from the Banque de France, meaning that the Banque de France may also have been involved in helping to secure the necessary physical to transfer to Venezuela.
Wherever the repatriated gold came from, it is now residing in a vault in Caracas.
Before the 2011/2012 repatriation, Venezuela held 211 tonnes of its gold reserves abroad. After bringing back 160 tonnes, this still leaves 51 tonnes outside the country. This remaining foreign stored gold is, according to Bank of America’s Francisco Rodríguez now held at the Bank of England.
Rodríguez also revealed that the gold held in Banco Central de Venezuela vault is in approximately 5 smallish compartments, and that in his view, all the gold that would be expected to be in the vault is in fact in the vault.
This would be about 316 tonnes of gold, which is just over 25,000 good delivery gold bars. With 5 compartments, that would be about 5,000 bars per compartment.
In November 2013, Bloomberg revealed that both Goldman Sachs and Bank of America had proposed loan deals to Venezuela. Bank of America's proposal was said to involve the bank acting as an intermediary to facilitate up to $3 billion in payments for Venezuelan companies seeking US dollars.
Goldman Sach's proposal was said by Bloomberg to involve a loan or swap of $1.68 billion in US dollars but collateralised by $1.85 billion of the Venezuelan central bank’s gold. That would have been about 47 tonnes of gold at the time.
Banco Central de Venezuela denied that it was considering the Goldman Sachs deal, but its unclear if this swap was ever implemented.
If it was, then part of the Banco Central de Venezuela's gold is currently spoken for. This would more likely be gold stored at the Bank of England than in Caracas.
With the Venezuelan economy remaining weak and Venezuelan bonds dropping sharply in value, it may be just a matter of time before Venezuela needs to use some of its gold for borrowing purposes.
Last week, S&P cut Venezuela’s credit rating from B – to CCC+. S&P said that they “assign CCC+ ratings in instances where we assess that issuers face at least a one-in-two likelihood of default over the next two years.”
Hedge funds are said to have started looking at Venezuela’s debt with a view to possible default.
On Monday in other gold developments in Venezuela, the International Centre for Settlement of Investment Disputes (ICSID), an arbitration court of the World Bank for investment disputes, ruled that Venezuela needs to immediately repay $740 million to a US mining company called 'Gold Reserve'. This repayment is connected to Venezuela having terminated Gold Reserve's Las Brisas gold concession project in 2009 as part of the then President Hugo Chavez's nationalisation of Venezuelan energy and mining projects.
This ICSID ruling could now set a precedent for other companies to seek compensation from the Venezuelan government during a time in which Venezuelan economy remains weak and heavily indebted. The ruling and earlier confiscation also highlights the stock specific risk inherent in precious metals mining stocks and the risks that these companies face when operating in politically unstable countries.
As the Venezuelan currency and bond market lurches into another possible crisis, it looks like the large international investment banks are waiting to provide increased financing or restructuring while the hedge funds look to profit on the sovereign debt.
The Chinese also supply financing to Venezuela on the understanding of getting continuous oil deliveries in return. Just last weekend the Joint Chinese – Venezuela Fund got an inflow of $2 billion from China to help with Venezuelan infrastructure and housing spending.
With China on one side and US banks on the other, it will be interesting to see who ends up financing the lions share of any needed Venezuelan sovereign financing packages.
Venezuela’s gold reserves may then come into play in some way or another.
Today’s AM fix was USD 1,224.00, EUR 952.87 and GBP 746.11 per ounce.
Yesterday’s AM fix was USD 1,225.00, EUR 951.01 and GBP 748.09 per ounce.
Gold climbed $7.60 or 0.63% to $1,222.90 per ounce and silver fell $0.01 or 0.06% to $17.80 per ounce yesterday.
Gold in USD – 5 Years (Thomson Reuters)
Singapore gold fell 0.1% to $1,221.04 an ounce. Gold bullion had climbed 1.5% yesterday, but trimmed gains to finish near 0.7%. Surprisingly, even the heightened geopolitical risk did not spur safe haven demand for the yellow metal.
Gold sentiment was weak yesterday despite price gains overnight. The largest Gold ETF, SPDR Gold Trust, saw a dip in its holdings Tuesday (1.2 tonnes to 773.45 tonnes), its lowest since 2008.
A strong dollar has been a contributing factor to gold's lack lustre demand, coupled with strong U.S. economic data such as manufacturing activity at a 4 1/2 month high has increased speculation for an earlier than expected rate hike.
The U.S. Federal Reserve’s next policy meeting is October 28 & 29th.
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