The Midas Touch

Goldfinger_Golden-girlBloomberg has a fun bit on the way Chávez’s gold buggery is coming back to bite us in the butt:

The bet on gold that former Venezuelan President Hugo Chavez made in the final years of his life is collapsing at the wrong time for his country.

Chavez, who argued that Venezuela should move away from the “dictatorship of the dollar,” stockpiled more than 70 percent of Venezuela’s foreign reserves in gold by 2012, the highest percentage among all emerging-market countries and more than 50 times that held by neighbors Colombia and Brazil, according to the World Gold Council.

After rewarding Venezuela with a rally of almost 400 percent in the past decade, gold has tumbled 25 percent this year, pushing the central bank’s reserves to an eight-month low and compromising the government’s ability to repay foreign bondholders. The yield on Venezuela’s dollar-denominated debt has risen 62 basis points, or 0.62 percentage point, to 11.84 percent in the past month, compared with an average increase of 57 basis points for other countries in Latin America.

“Venezuela’s reserves have taken a big hit,” Francisco Rodriguez, an economist at Bank of America Corp., said by phone from New York. If current gold price levels continue, “then you will see an increase in perception that Venezuela’s capacity to pay is weakening.”

Oh brother

[Hat tip: CD]

27 thoughts on “The Midas Touch

  1. Somebody has to ask this question- Is the gold still there? Has it been secretly shipped to Cuba? Can an independent audit be done?

    Chavez loved to hold those gold bars and he always had a $hit-eating grin. Chavez clearly acted like he owned the gold.

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  2. Surely, the more pressing detail is that of determining how much of the bullion is actually under uncluttered Venezuelan control? When that is known, one can talk of its value. Shades of Spanish bullion in the late 30’s?

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  3. And here’s the elephant in the room. From the same article: “Venezuela has been losing cash reserves because of an excessive demand for dollars from the import sector due to an overvalued exchange rate,” said Victor Olivo, an economist at the Universidad Central de Venezuela in Caracas and a former economist at the central bank. “This is a government which consumes lots of funds in projects that don’t generate dollars and almost the only export is oil. There are underlying problems that need to be resolved.”

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  4. That’s the problem with delusional thinking, eventually it costs you money. There are so many gold nuts out there ripe to be taken advantage of, Chavez at least wasn’t able to afford new gold purchases at the previous high price. It could have been worse

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  5. “Is weaking”… like, the derivative of revenue is just twisting a little bit to the down side

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  6. I’m just visualizing the internal Gollum-like dialogue that went on inside HCF’s head:

    “We musts escape the dictatorship of the dollar, Precious, we musts!”

    “But the gringos are our friends?”

    “You don’t have any friends! Nobody likes you excepts those who gets free oil!”

    “Oh, but how, how do we escapes those evil pesky gringoeses?”

    “By buying preciouseses denominated in dollars, Precious! Of courses!”

    “Yesssss! We’ll show those stinky yankees, we will, Precious!”

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  7. Incidentally, while 62 bp rise in yields featured prominently in the second paragraph describing the decline in gold might seem significant compared to the 57 Latam average…Venezuela’s bond yields are so high (the mentioned 11.84%) to begin with that the actual percentage change in yield for the bonds (5.5%) trails the LatAm average, which the last time I checked, was just above 6%, so it doesn’t necessarily strengthen the argument. For example, Brazil, which admittedly has a lot going on, has its yields jumping ~100ish bp, or roughly 20% in the same time frame. (Although this would shift the overall average up a bit to boot.)

    In general, over the past 60 days or so, and at a much more accelerated rate in the past 30, money has been flowing out of the bond markets, particularly in the emerging market side of things. So, it would be expected that yields would float up as market prices for those bonds drop off. I think it is erroneous of Bloomberg to take a systemic/market trend and infer something that is particular to Venezuela. What is it econ professors like to say? Correlation does not imply causation.

    The real significant thing to watch is the shift in CDS and the 400ish bp jump there.

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  8. Disclaimer: I could dig up harder numbers, but its still relatively early in the morning on a holiday, so forgive the inherent laziness.

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  9. Pero eso es verdad? El oro ya estaba ahi, el oro subio y el sefue gastando lo que eraliquido, pero el no hizo “stockpiling”, simplemente lo dejo ahi tal cual.

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  10. Sorry for the spanish comment, lapsus, I said, but is that true? The gold was there and he spent the liquid part of reserves, but he did no stockpiling of gold, he hust left it thereasut was.

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    • I don’t think it was necessarily stockpiling per se, rather that he pulled the reserves back within the borders rather than leaving them in the various reserve locations.

      Want some happy news? If the World Bank is right, some of that gold has found its way back outside of Venezuela.

      http://bit.ly/12JtS5L . Funny thing there, if the data is true, Venezuela’s reserves fell pretty precipitously in 2012, which we all pretty much know…but in 2011, reserves were sufficient to rank with petrostates such as Kuwait and Qatar. Now? Bounded on one side by Trinidad & Tobago and the other being Pakistan. Great company!

      I have to wonder, though, given the news out of Singapore, if any of the esteemed leaders of the Revolution will be taking a trip there any time soon. Can’t imagine why they’d want to do so.

      http://www.economist.com/blogs/schumpeter/2013/07/

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      • A lot of interesting figures there. I wonder how accurate the figure for Venezuela is, if that’s true, Venezuela liquidated at least a quarter of its gold reserves (and that is assuming all the rest of reserves are in Gold)??

        PS. You can see the US treasury shifted hundreds of billions from reserves, part of that was the profit returned to the government in 2012, in part made during the financial crisis.

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  11. If you have too much of your money in any one thing–including gold–you are taking a big risk. Responsible investors concerned about the future diversify their holdings.

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  12. Venezuela’s BCV reserves are at best $20 billion, assuming gold marked to market, and assuming no unannounced large transfers out in the last 6 months, as alleged by a friend, who says he has proof of a transfer to Cuba of a couple $ billion while Chavez was sick. Bs. monetary liquidity is 800+, making an implicit rate north of 40. Forget the new Sicad, et. al.: Venezuela exported only an average of 735m bbls/da. to the U. S., really its only cash-paying customer, in Jan.-Mar. 2013, down from an average 900m+ bbl/da. average in 2012, and some twice this figure at the start of Chavez’s reign (of tears). Plus, one must subtract 100-150m bbls/da. imports of gasoline/other refined products at international market prices to compensate for past/current disasters at the Paraguana refineries. The Chinese told Venezuela they would lend new money only against gold. Look for 100/$ in the next 2-3 years with current political/economic policies.

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