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Dollar Better than Gold? Ask Venezuela
Venezuela's recent experience is instructive. The Chavez regime had moved away from the fiat US dollar and had the bulk of its reserves in gold. Last month, Venezuela's reserves had been drawn down to about $19 bln, of which $14 bln was thought to be gold.
Venezuela has found out the hard way that dollars are better than gold. At the end of last month, it swapped 1.4 mln troy ounces of gold for $1 bln with a large US bank.
Venezuela's gold was discounted by a little more than 40% and it will pay interest on the dollars it receives. The swap is four years in duration, and at the end of it, Venezuela has the first right to buy the gold back.
It is true that Venezuela has a relative extreme macro economic situation. The IMF expects the economy to contract 7% this year after 4% contraction in 2014. Inflation is projected to be well over 100% and the fiscal deficit may be 20% of GDP. The black market rate for the bolivar has depreciated by nearly 50% so far this year. We suspect that when push comes to shove, and it will, Venezuela is more likely to officially devalue than default on its local debt.
One of the advantages for Venezuela of the gold swap is that by some accounting it may still count the gold as part of its reserves. This underscores that central bank reserves many not always be what they seem. Central banks have used a number of ploys to hide the extent of their intervention, like operating in the forward market or conducting off-balance sheet operations, like Brazil's currency swaps. Similarly, Russia had included its sovereign wealth funds in its reserve calculations, but they are not liquid or available.
The dollar's status as the primary reserve assets is partly a function the liquidity and depth of the US capital markets. Gold is not a particular liquid or deep market. Countries cannot service their debt with gold. To monetize it, Venezuela is paying a steep price--a 40% haircut plus interest on its dollar borrowings.
This is not about the present or future price of gold. Venezuela's experience speaks to the use of monetary gold. To service one's debt and pay for imports, one needs paper money or claims thereof. About three quarters of the US reserves are in gold and almost 70% of German reserves are in gold. Greece and Portugal also hold a high proportion of reserves in gold.
This says something about the low level of currency reserves as well as the gold holdings. US gold reserves are worth around $800 bln. Portugal 's economy is about a tenth of the size of the UK, but it has about 70 tonnes more of gold.
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You all seem to be missing this point - "One of the advantages for Venezuela of the gold swap is that by some accounting it may still count the gold as part of its reserves".
So Citi has the gold, and Venezuela has the gold at the same time. Fractional reserve gold.
Shearing the Maduro followers while adding to both your balance sheets. Freaking brilliant. Unless you are a J6P in Caracus.
Anybody really think that that simple 'trade gold for dollars' was that much of a singular event?
I don't.
With so much leverage how can cash not always be King here?
So forget the dollar for a moment and look at the actual production of oil and natural gas in the USA right now...as consumption of refined product has collapsed mind you.
So yes...production has soared and consumption has collapsed in the energy space. With yields north of 7% in a lot of shale plays right now that's a powerful incentive to buy.
Wall Street has every reason to be flexible with loan convenants right now because this still remains the worst economic recovery in post war history. That says to me lots of dollars worth investing in here.
Here's an alternate source for more news: 'Venezuela Pledges 1.4 Million Ounces Gold as Collateral in CitiBank Deal'
http://bit.ly/1DRujZU
Citi-Bank will make out like bandits...
Did they sell the gold, or re-hypothecate it?
This author was a currency trader for none other than Brown Brothers Harriman.
'Nuff said.
Could it just possibly be a loan backed with the gold as collateral and the lender only lent 60 percent of the gold value? Is so, then no biggie?
Pawn shop
This is what Gold is for. When you're in a shit hole sell it and survive another week.
and when it all goes sideways and no conterparty risk instruments will be accepted.
Well after the gov shut down by takeover all liquidity in the economy it destroyed because it was destroyed and had to take over more of the economy since the greedy gov ran operations like shit..... the elite gov wealth found gold isn't so great for but wiping and needed some toilet paper! Leaves r for the common man!
'Banking' on the continuity of the $USD as trade vehicle Uber-Alles, forever & ever is the easy, fall-back position to take. After all, what has been will always be and besides, everyone else is engaged in BTN as well, so nothing will ever change, right...? Perhaps. Then again, both Russia and China (the only two credible threats to that $continuity), are nations that have seen much worse in current modern history, than the U.S. has. And although neither may have an appetite for immediate (but very short-term) economic pain without the $USD trade mechanism should that situation come to pass sooner rather than later, both countries would likely survive the 'shift' in a lot better condition than the U.S. In any event, when that fateful time comes, it is likely to come on like a flash flood, not a long drawn-out soap opera like Greece.
Venezuela did NOT swap gold for dollars. They swapped gold to the Zionist banksters to stave off an invasion, or worse, by Zion's war dog, the DC US.
Liberty is a demand. Tyranny is submission.
"Less 40% and usury to boot?! Sure, just keep Nuland and her Zionist-chip cookies far from Caracas."
Ecuador did a similar thing recently, or it was announced last year. But we might not know how much gold was loaned or transfered to the USA at this point.
Columbia is pretty chummy with the USA, I wonder how much gold they have transfered to the USA.
Might be worth while to Look at the Foreign Holdings of US Long Term Treasuries as well
Brazil $259.9 Billion
Colombia $36.0 Billion (up Trend)
Chile $25.7 Billion
Peru $10.8 Billion
Carib Bkg Ctrs 4/ $350.6 Billion (up Trend)
Belgium $345.3 Billion
Oil Exporters 3/ $296.8 Billion
Switzerland $201.7 Billion (up Trend)
United Kingdom 2/ $192.3 Billion
Luxembourg $179.2 Billion (up Trend)
Taiwan $165.9 Billion
Ireland $138.0 Billion (up Trend)
Singapore $109.7 Billion
India $101.7 Billion (increase)
Canada $70.9 Billion (up Trend)
Article is trying to trash gold more than actually doing research. A 40% haircut on gold is fine as long as you get to buy it back in 4 years with the same haircut in price. Literally any haircut would be acceptable.
Where is the gold physically stored? It if is still in Venezuela, then the only thing the bank did was hand over dollars in HOPE of seeing the gold one day. Will Venezuela deliver as promised? Or take the money and run! Just ask the big oil companies that lost assets in Venezuela.
And amazingly, the author states that the US has three quarters of its Central Bank reserves held as gold - or $800 billion? Where did that number come from? Is the gold still there? And if so, why are Fed talkers constantly trashing gold? Plus, last I checked, the Central Bank had over $4 trillion on its balance sheet!
Then after trashing gold and pumping fiat paper - the author implies how wonderful it is for some countries to have lots of gold as part of their reserves!
Yes, you do see a baseline around $800 Billion until the 2008 Crisis.
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All Federal Reserve Banks - Total Assets, Eliminations from Consolidation, 2015-04-29: 4,471,499 Millions of Dollars (+ see more), Weekly, As of Wednesday, Not Seasonally Adjusted, WALCL, Updated: 2015-04-30
https://research.stlouisfed.org/fred2/series/WALCL
AU is not money...period...tertiary it is a storehouse of value, second a metal with scientific application, foremost a precious metal for jewelery. GL investors.
you got that list backward
Another stunning (stunned?) move from the egalitarian paradise of Venzuela under Chavism.
And more support for my thesis that Venezuelans suffer from Toxoplasmosis.
"At the end of last month, it swapped 1.4 mln troy ounces of gold for $1 bln with a large US bank."
Which US bank?
Let's take a wild fuckan guess.......haha.
Truly stunning how the Wall Sreet banks can loot and pillage entire countries and essentially steal their physical gold.
So they didin't have a choice? I don't see how they got looted. What they did is hock their gold to the highest bidder because they're broke ass socialists. They looted themselves.
Maybe you should read some books like Confessions of an Economic Hitman by John Perkins.
There youll find some answers when it comes to US foreign policy and how they are looting other countries.
They had a 'choice' alright, and his name was 'Hobson'...
This is what Democracy Looks like? Like playing with Big Boys who go by Mafia Rules or whatever you call Cutthroat Pirate Rules of Business.
See last thing you want to do is join the modern system.
When you join the system with Bonds or IPOs on Wall Street, Expose your currency to Foregin Exchange... You are exposed to Asymmetric Warfare.
I've never heard of School Millages becoming a problem, but locally that is just $1-2 Million Dollars.
Your Municipal or County certainly can be attacked though.
Of course in Big Cities like Chicago you seem to be under attack by racketeering Employees that want to advance themselves and enrich themselves.
Big 3 US Auto Companies failed to survive negotiations with the Unions. Maybe employees took favors to provide Executives with false or misleading data prior to union negotiations.
Networking becomes criminal at certain points. Misuse of Funds, Tax Fraud, Accounting Fraud, Racketeering, Wire Fraud. Campaign Finance Fraud. Destruction of Official Emails.
My thoughts exactly..lol
CB accounting, what a joke as it bears absolutely no resemblence to what is fair and reasonable accounting used by most (not all) real businesses operating. Hell, most if not all CBs aren't even subject to audits to verify their assets and liabilities so there is no incentive, mechanism, etc. to report anything else other than what is PC and needed to keep the masses in line (at the moment).
When financial information is reported, the two areas that are most easily "manipulated" for external presentation are the lower left section of the assets (i.e., the area where IP, goodwill, soft assets, etc. are reported) and the lower right section of the liability section (where contingencies, committments, and/or other long-term obligations which rely heavily on the use of estimates are reported). So basically, CBs have mastered the art of over-inflating assets on their balance sheets and under reporting liabilities/obligations, all in lock step with their partners in crime, federal governments.
So MtoM, let's make sure we understand your argument correctly as follows:
- The USD, issued by the Fed, is basically supported by financial statements that are at best, unreliable and at worst, fraudulent (e.g., forget about utilizing mark to market accounting). It's primary assets including US debt and MBSs will get hammered in a rising rate environment on numerous fronts not to mention that the primary collateral supporting these assets is even a promise from a bankrupt country (US for the US debt) or real estate assets that maybe are worth half of the paper value of the MBSs.
- Gold, which was used by Venezuela to support the loan as collateral, was provided to the US Bank at a 40% discount. Hell, the US Bank is probably hoping that they default so they can take the gold, and easily sell it into markets in Asia at a large premium. If there's one lesson we've learned time and time again is that when these weaker countries give up control of their gold, it's gone, like a fart vanishing in the wind.
No, Venezula took this deal because the country is in dire straights, basically beyond repair, ready to implode under decades of poor economic conditions and misdirected socialist policies. They had no other choice so they coughed up their last asset of value at a huge discount and took it in the shorts. This is really no different than a company, on its last leg, offering its best collateral to a vulture lender of last resort that is working through its final survival plan before imploding.
Can't imagine what the mood will be like in Venezula when the people find the gold is gone for good. Sure, you got some short-term liquidity in the form of USDs to keep the ship afloat for a while and the peasants in order but in the end, the result will be the same. A brutal devaluation, destruction in the old guard, and reduction in the standard of living which by the way should have been pushed forward earlier rather than later (as to rub salt in an open wound, their gold will be gone as well).
However and with all of this said, the USD may have one last run it it over the next 3 to 5 years as the default currency of choice as no other currency really offers a better value proposition. But in the end, some type of global reset will without question take place as the world finally realizes it has too much of one thing (i.e., debt) and not enough of another (i.e., real income to service the debt). You can use whatever smoke and mirrors you want to mask the huge debt problem including surpressing interest rates (check), lenghtening repayment terms (check), using secondary repayment sources to cover the debt (check, check including QE and bail-ins and now negative interest rates), and even defaulting (check) but in the end, when the debt monster finally is just too big to service, it will come crashing down, sparing no soverign debt or currency in its path.
3-5 years...? I'll take 3 - 5 months with a ~slight~ caveat:
When the U.S. sticks it's finger (or is its whole arm...?) into the Ukranian hornets nest likely sometime later this year, that will be the trigger for both Russia AND China to enter launch sequence codes (not necessarily nuclear weapons, but perhaps the weapon with even more destructive power), as the U.S. will have played its final hand in the game of isolation. There is a reason China continues to buy while keeping its hoard a mystery, and it isn't for decoration.
Well delivered.
I fail to see the problem here. Venezuela has essentially taken their gold reserves to a pawn shop. If they make good on their part of the bargain, they will get their gold returned to them.
IF you trust the pawn shop not to sell (or re-pawn) your Gold while it awaits your return.
That is a mighty big IF.
We didn't sell it but we'll hold it for you. You can have it back, maybe 5,000 oz per year. It's all good.
OK so where exactly are Venezuela's gold reserves located?
Does someone actually pay you to write this ridiculous anti gold propaganda and absolute bullshit?
Another all time low for Marc the Wall Street shill at Zero Hedge.
Just brand the author as a "yellow journalist"
I didn't see it as anti-gold. To me it shows how failed govs will sell you anything they have of value to stay in power.
I gotta go with BoP on this one. Complete and utter crapola of an article. Absolutely zero factual analysis. Baseless propaganda and fear-mongering.
Marc Chandler of Brown Brothers Harriman is the fungus among us. He is part of the problem. He loves slimy fiat paper currencies and will always denigrate the pure elements found in the earth.
He says he states facts but he really has no idea on the who, what and where when it comes to gold issues.
Nobody does. The gold secrets are hidden from view and guarded like nuclear launch codes. That is the sad fact.
As long as the gold remains physically in Venezuela they will be in fine shape in less than a year when the dollar collapses.
So you're prediction is a dollar collapse in less than a year? to replaced by what? Euros?
new system
Like this?
I think precious metals are to often compared to currency like the dollar. It is far more likely precious metals will replace bonds as the prefered safe asset than currency. I would love it if it did replace currency but even if it did, it would still replace bonds as the 'safe asset' as well.
Sure but not within the year. There is still a lot of QE left and the whole world seems to be ok with printing their way out of debt. So this can drag out for a few years.
Epic Stupidity! What US bank offered this deal? GS or JP?
It was Citi!
"The swap is four years in duration, and at the end of it, Venezuela has the first right to buy the gold back"
Buy the Gold back with what? USD's. :)
The Chavez regime? Didn't Chavez go to communist heaven?
Several issues here:
Yo Soy uno Curacano para uno problemo!
Donde' Estas Los Plata y Oro y Dinero Mio!!