Chavez Emptying Bank of England Vault as Venezuela Brings Back Gold Hoard

http://www.bloomberg.com/news/2011-08-18/chavez-emptying-bank-of-england-vault-as-venezuela-brings-back-gold-hoard.html

By Daniel Cancel and Nathan Crooks - Aug 17, 2011 11:38 PM ET

Venezuelan President Hugo Chavez ordered the central bank to repatriate $11 billion of gold reserves held in developed nations’ institutions such as the Bank of England as the metal rises to record levels behind a weakening U.S. dollar.

Venezuela, which holds 211 tons of its 365 tons of gold reserves in U.S., European, Canadian and Swiss institutions, will progressively return the bars to the central bank’s vault, Chavez said yesterday. JPMorgan Chase & Co. (JPM), Barclays Plc (BARC), Standard Chartered Plc (STAN) and the Bank of Nova Scotia (BNS) also hold Venezuelan gold, the president said.

“We’ve held 99 tons of gold at the Bank of England since 1980. I agree with bringing that home,” Chavez said yesterday on state television. “It’s a healthy decision.”

Chavez, whose government depends on oil for 95 percent of export revenue, is looking to diversify Venezuela’s cash reserves from U.S. and European banks to include investments in emerging-markets including Brazil, China, India, Russia and South Africa, central bank President Nelson Merentes said yesterday. Chavez, whose nation is the world’s 15th-largest holder of gold, is bringing back the reserves after a 26 percent rally in price this year.

Venezuela’s reserves stood at $28.6 billion on Aug. 16. Venezuelan Finance Minister Jorge Giordani said that the weakening U.S. dollar, a near-default by the U.S. government and the European sovereign debt crisis threaten the country’s savings and they will be more secure at home and in “allied” countries.
‘Green Light’

Chavez, speaking by phone on state television last night, said he signed the document yesterday authorizing the transfer of the gold reserves. “I said, ‘I give my absolute approval to this idea,’ I gave it the green light,” Chavez said.

The central bank already has about $7 billion of gold in its vaults. Of the country’s liquid reserves, which amount to about $6.3 billion, 59 percent are held in Switzerland, 18 percent in the U.K and 11.3 percent in the U.S., according to a government report.

The government may be moving to repatriate reserves ahead of arbitration case rulings to avoid an “attachment risk” that could freeze international assets, Boris Segura, a New York- based strategist at Nomura Securities said in a research note.
Government Holdings

The repatriation and diversification of reserves may also cloud transparency of government holdings, which would be a negative for the country’s credit, he said.

“We sense that Venezuelan debt prices already incorporate a sizeable ‘lack of transparency’ premium,” Segura said. “However, looking at the possible geopolitical signals that these proposed policies communicate, we fear that Venezuelan bond prices may suffer.”

In all, Venezuela has 365.8 metric tons of gold reserves, according to the World Gold Council.

Venezuela has the highest borrowing costs among major emerging-market countries. The extra yield investors demand to own Venezuelan government bonds instead of U.S. Treasuries was 1,186 basis points, or 11.86 percent yesterday, according to JPMorgan & Chase Co.’s EMBI+.

Chavez also said yesterday that he’s preparing a decree to nationalize the gold industry to halt illegal mining and dedicate local production to building up reserves.

Of 17 arbitration cases pending against Venezuela in the World Bank’s International Centre for Settlement of Investment Disputes, at least three of them are over mining ventures, including Crystallex International Corp. (KRY), a Canadian gold producer whose Las Cristinas mine was taken over by the government in February.
‘Not Surprising’

Gold Reserve Inc. (GRZ), a Spokane, Washington-based mining company, is seeking $2.1 billion in damages after its Las Brisas gold and copper project was seized in May 2008.

“Today’s announcement is not surprising,” said Doug Belander, Gold Reserve president in an interview. “We believe that their objective all along was to take over the entire industry.”

The South American country, in an effort to boost stalled production and take advantage of rising prices, last year relaxed restrictions on gold exports to allow some companies and joint ventures with the government to send as much as 50 percent of their output abroad.

Rusoro Mining Ltd. (RML), a Vancouver-based mining company, is the last publicly traded company operating in Venezuela. The company’s stock fell 17 percent in trading yesterday to 12.5 Canadian cents, the lowest in almost a decade.
Gold Production

Venezuela produces 11 metric tons of gold a year, and illegal miners extract an additional 10 to 11 tons a year, Chavez said in May.

Venezuela’s National Guard first seized control of the Las Cristinas mine, which has reserves of about 27 million ounces, in November 2001 from Canada’s Vanessa Ventures.

Gold futures for December delivery rose $8.80, or 0.5 percent, to $1,793.80 an ounce on the Comex in New York yesterday. Prices touched a record $1,817.60 on Aug. 11.

“If there isn’t enough room to store the gold in the central bank vaults I can lend you the basement of the Miraflores presidential palace,” Chavez said.

To contact the reporters on this story: Daniel Cancel in Caracas at dcancel@bloomberg.net; Nathan Crooks in Caracas at ncrooks@bloomberg.net.

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net