Archive for March 12th, 2009

The irrelevant sale of the Venezuelan Central Bank’s gold

March 12, 2009

A local newspaper published an article this week saying that the Venezuelan Central Bank had sold 7 Tons of gold in order to generate gains so as to cover the hole left by the transfer of US$ 12 billion to the development fund Fonden.

Well, the first part may be true, the Central Bank may have sold some gold, but the rest of the story is simply not true and in the end absolutely irrelevant.

First of all, the Venezuelan Central Bank has (or had) some US$ 10 billion in either gold coins or gold bars, according to the December 2008 balance sheet, adjusted for the change in the price of gold since that date.

But let’s look at how much 7 Tons of gold is. One Troy Ton of gols represents some 32,000 Troy ounces of gold. At current prices of US$ 900 per Troy ounce, this represents US$ 189 million, sounds like a lot to you and me, but in te scale of the US$ 10 billion in gold or US$ 28 billion in reserves, it is very little. It is also small in the scale of the US$ 12 billion transferred to Fonden and would have generated in gains, if the story was true, 1% of the amount transferred to Fonden.

But what makes the story absolutely incorrect is the fact that as can be seen in the financial statements of the Central Bank, the bank marks to market the gold, i.e. it registers it evey month at the current market price of the gold.

Most likely this was a decision by the Venezuelan Central Bank to keep gold as a fraction of reserves at a certain level. Given that gold has gone up in price so much in the last year and that reserves are down, such a strategy would make a lot of sense.

I have no clue or information as to how the gold in the reserves is managed, but what is clear to me is that the size of the trade was mostly irrelevant and the reason given can not possibly be true.

Unfortunately the media jumped on it and has been repeating the story, without verifying the facts.