Return of the Comandante's Gold


"Venezuela's gold repatriation could serve as a de facto run on the bank—driving up gold prices in the process."

Back in August, we discussed the precarious proclamation that Venezuelan President Hugo Chavez was shipping his country’s gold reserves home for safekeeping. On Friday, we learned Chavez’s chosen transportation method for "Operation Gold" was through the air, after the first shipments arrived to much fanfare in Venezuela. Reuters described the scene:

"Excited crowds lined the roadside waving big Venezuelan flags chanting 'It's returned! It's returned' as a convoy of soldiers and armored cars carried the [gold] ingots from Maiquetia airport to the central bank in Caracas. . .

. . .Drums and sirens sounded out across the square as many in the crowd sang 'Forward comandante!' in support of the president. Some waved homemade signs that said 'The gold has returned thanks to Chavez!' and 'Long live our sovereignty.'"

This was just the first shipment in a plan that calls for all of Venezuela’s gold held in foreign countries—roughly 160 tons worth some $11 billion—to be returned home. A government official stated the gold shipments would be wrapped up by the end of the year, but would not offer any details on the shipments' country of origin, says Reuters.

The convoy of 500 armed soldiers, tanks and aircraft was led by Nelson Merentes, president of Venezuela’s central bank, who played the role of grand marshal for the gold parade. A Financial Times story quoted Merentes as saying, "We are bringing the gold back because unfortunately capital markets and the world economy are in turmoil, and for that reason it is preferable to seek protection."

No doubt these comments were intended to soothe suspicions that the gold repatriation is motivated by the sanctions suffered by Chavez's friend and former ally Moammar Gaddafi during his country's fall into civil war.

Venezuela's gold had originally been sent to Europe in the 1980s and 1990s to guarantee the country's loans from the International Monetary Fund (IMF). Now, it's been theorized the gold is being shipped back to serve a similar role for the country's growing debt to China. Over the past five years, China has loaned the Latin American country $32 billion, including a $4 billion loan just a few weeks ago.

A move of this magnitude can significantly affect the gold market regardless of whether Chavez's motivations are nefarious or patriotic. Banks often keep only a portion of their bullion deposits on hand, reselling or lending out the rest—similar to how cash deposits are treated in your own personal bank account.

Venezuela's gold repatriation could serve as a de facto run on the bank—driving up gold prices in the process. Some believe Chavez's announcement of "Operation Gold" was a catalyst for the August run-up in gold prices, but there is no way to be sure. However, the impact could be significant if other countries employ a similar strategy.

Frank Holmes, Resource Investor

Read Ocean’s 2011: Venezuelan Gold Now

Frank Holmes is CEO and chief investment officer of U.S. Global Investors. This first appeared in his Frank Talk blog.

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