Thursday, September 01, 2011

Venezuela Moves to Return Gold Reserves Home

Bloomberg: Chavez Emptying Bank of England Vault as Venezuela Brings Back Gold Hoard
Bloomberg: Chavez Preparing Government Takeover on Venezuela’s Gold Mining Industry
FT: Venezuela to Nationalize Gold Industry 
WSJ: Venezuela Moves to Take Over Gold Sector

Earlier this month, Venezuelan President Hugo Chavez announced a plan to return the country’s gold reserves to Venezuela. The price of gold has skyrocketed in the last few years in the wake of the global financial crisis, thereby increasing the commodity’s importance in global finance as a haven in rough economic times. Venezuela is the 15th-largest holder of gold in the world, with approximately two-thirds of its international savings held in the form of gold. Currently, however, 211 of Venezuela’s 364 tons of gold—approximately $11 billion worth—are stored in institutions located abroad in global economic centers such as London and New York.

President Chavez decided to bring Venezuelan gold “home” as a way to ensure its security. The Venezuelan Finance Minister clarified that recent events like the weakening of the U.S. dollar, the U.S. government’s near-default on its debt obligations, and the European sovereign debt crisis have exposed instability in the developed world that makes Venezuela’s savings safer elsewhere.
President Chavez claims that he wants to defend Venezuela’s assets from those whom he believes might take Venezuelan wealth for their own purposes, including the U.S. and U.K. In addition to returning some of the gold to Venezuela, the government will also send some to emerging markets, such as Brazil, Russia, India, and China, that it views as more friendly to its government.

In a parallel move, President Chavez also decided to nationalize the gold mining industry, which further increases the government’s control over the gold supply. Nationalization has been common in Venezuela during Chavez’s term as president, so the decision came as no surprise to many observers. However, unlike its sizeable oil industry (infamously nationalized early in Chavez’s presidency), Venezuela is not among the top gold producers in the world, producing only 100,000 ounces of gold per year. Furthermore, legal production of gold pales in comparison to the approximately 400,000 ounces illegal miners extract each year. Although Chavez cites this extensive illegal mining as a pretext for the nationalization, critics see foreign mining companies as targets as well. The Venezuelan government does have a history of intervening in foreign gold-mining operations. In February of this year, for instance, it terminated a Canadian company’s contract to develop one of Latin America’s largest gold deposits located in the southeastern part of the country. Many of these foreign companies are now seeking redress from the Venezuelan government through international arbitration.

Skeptics of the two moves believe that Chavez’s intentions go beyond mere security concerns. Moving gold to “allied” countries may be an attempt to prevent the U.S. or U.K. governments from seizing the gold to satisfy foreign investors if and when they succeed on claims against Venezuela in international arbitration. It may also be an attempt to improve economic ties with emerging economies as the Venezuelan economy continues to struggle. However, some experts believe Chavez’s decision may leave the country even more economically vulnerable than it already is. The lack of transparency resulting from Venezuela’s relocation and increased control of its gold reserves (essentially its savings) will make it difficult for outsiders to know the state of Venezuela’s finances. If investors come to believe that investing in Venezuela is even more risky than it already is, they will demand more protection for their investment in the form of a higher interest rate on Venezuelan bonds, or they might refuse to invest in Venezuela entirely. Rising interest rates would increase Venezuela’s borrowing costs and, therefore, its already large debt. Increased debt would cause more investor uncertainty, which would further damage the Venezuelan economy. As a result of this economic reality, Chavez’s decision may do more harm than good.

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