Venezuela reported planning to pawn its gold through Goldman

[ukipa]

Venezuela reported planning to pawn its gold through Goldman Sachs

By: Chris Powell, Secretary/Treasurer, GATA

Dear Friend of GATA and Gold:

The Venezuela newspaper El Nacional, the voice of that tortured country's political opposition, reports today in the story appended here that, after triumphantly repatriating its gold reserves two years ago, Venezuela has sunk so much economically under its predatory socialist regime that it will raise cash by pawning its gold through Goldman Sachs.

That gold almost surely will be delivered by Goldman Sachs to the use of the Western central bank gold price suppression scheme.

Presumably Venezuela's friend China could have bid directly for the gold and apparently didn't, maybe suggesting that China may be glad of the resulting discounting of gold on the international market, especially since the Venezuelan gold well may end up in Beijing anyway after nicekly knocking prices down in its travels.

The translation below, done largely by Google Translator, is far from perfect but may convey the idea well enough.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Venezuela's Central Bank to Trade Gold with Goldman Sachs

By Vera White Crocus
El Nacional, Caracas, Venezuela
Tuesday, November 19, 2013

www.el-nacional.com/economia/BCV-negocia-reservas-Goldman-Sachs_0...

Venezuela's Central Bank and Goldman Sachs are ready to sign an agreement to swap or exchange international gold reserves, with a start date in October, as stated in the contract, and until October 2020.

The negotiated amount, equivalent to 1.45 million ounces of gold, are deposited in the Bank of England and the transfers are made directly to Goldman Sachs once delivery times are stipulated.

The operation involves the delivery of gold from the central bank, which will receive dollars from the U.S. firm. The transactions are made through the creation of a financial instrument that is traded in the international market.

During the term of the instrument is an account called "margin," in which the central bank agrees to deposit a larger amount of gold in the event that the price of gold falls or in which Goldman Sachs deposits a larger amount when gold increases. "At the expiration of the transaction the contributions are returned to their owners," the document says.

There will be an adjustment to the asset value of 10 percent, to be used as a hedge in case the international market price falls, indicating that the U.S. bank takes care that if it produces a depreciation it will be covered and Venezuela would assume risk. The annual interest rate will be a combination of dollars with the call BBA Libor equivalent to 8 percent.

The gold dollar instrument is sold in the secondary market that exists for this type of instrument and can be purchased by investors, usually businesses. The idea is to negotiate the instrument to obtain a commission that becomes profitable, depending on the price of the metal.

Any dispute between the parties will be resolved in English courts.

The contract is presented by the representative of the central bank, its President Eudomar Tovar. Gold bullion deposited abroad was placed in the vaults of the central bank in 2011. It is estimated that only 15 percent was outside the country. The projected cost of the transfer was $7 million. The first bullion came from France in the middle of an operation called Patriot Gold, involving more than 500 officers.

On that occasion the then president of the central bank, Nelson Merentes, said that first shipment was part of the 160 tons of gold that would move back to the country in several shipments, which represented 85 percent of the international reserves in bullion held nationwide.

The economist Jose Guerra explains that this operation is being undertaken because of the fall in international reserves. At December 31, 2012, they closed at $29.8 billion and in contrast on Nov. 15 totaled $20.6 billion, a loss of $9.9 billion in 11 months.

"The gold operation aims to give liquidity to the Central Bank of Venezuela when they are in the lower limit since 2004. Just $1.2 billion are liquid at this time and are used to fund 10 days of imports."

Guerra adds that there are needs for payment and to Colombian entrepreneurs, who are paying a portion in bonds, but others did not accept the cash and demand mechanism. We also have to replenish inventories for appliances and other products, and plan to use this new money.

"The Republic ended up taking us into the hands of a Goldman Sachs mortgage by this gold operation."

Note: Members of this forum are welcome to ask questions about this transaction by entering in direct contact with me (Tony) at the email registered with this forum's administration.

[ukipa]

Update (Nov.22, 2013): The people of Venezuela are against this deal. Other options are being considered.

[ukipa]

UPDATE: The people of Venezuela won. The deal has been dropped.

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What Is Goldman Sachs Doing With Venezuela's Gold?

By Bob - G.

A while back Greece had a problem. The problem was that it wanted to borrow more money, but didn't want to increase its debt. (Because the European Union would frown on it having more debt.) So it went to Goldman Sachs, and Goldman told Greece, well, what you can do is borrow some money from us, but we won't call it debt, because something something something something swaps.

This worked pretty well for everyone, for a while: Greece got the money, but nobody outside the deal understood that it had borrowed the money, because it was part of a derivative trade that was not accounted for as debt. Then it stopped working, and everyone got mad at Greece for disguising its debt, and at Goldman for helping Greece disguise its debt and charging rather richly for the service.

Anyway last week Goldman said it was sorry and wouldn't do that any more:


Goldman Sachs Group Inc. (GS) Vice Chairman Michael S. Sherwood said his firm would refuse another deal like the derivative it sold Greece that masked the nation’s growing debt to help it meet European Union standards.

“We absolutely wouldn’t do a transaction like that today,” Sherwood, 48, said in an interview posted on Channel 4’s website yesterday in London. “There have been transactions of that ilk that have been presented to us by other European sovereigns that we’ve turned down because we felt there wasn’t the appropriate transparency surrounding them.”

I cannot entirely agree -- I'm sort of of the school of "if it's legal1 and it pays you a lot, you should do it" -- but there's probably a reason Sherwood is giving interviews about reputational risk and I'm a blogger.

But a hedge fund reader points me to an intriguing modern parallel, or at least the rumor of one.2 Venezuela, it seems, has a problem.3 In its foreign currency reserves, where most countries keep foreign currency, Venezuela has a lot of gold, because its late President Hugo Chavez really liked gold and wanted to "move away from the 'dictatorship of the dollar.'" It has rather fewer dollars, and it turns out that if you want to buy goods and services in international trade, dollars are more useful than gold.4 Thus the problem.

The normal way to solve that problem is to sell some gold to someone who has dollars. Then you'll have less gold, but more dollars, and the dollars can be used to buy goods and services. But if you're Venezuela, there are problems with this too. For one thing, it seems like sort of a repudiation of your late president's policies. For another thing, spending down your gold reserves might suggest that you're in a bit of a tight spot financially, which though true is awkward.

Also, gold was worth $1,800 an ounce a year ago and is now worth like $1,240 an ounce, so it feels sort of crummy to sell a bunch now.

In comes, apparently, Goldman Sachs? Here is a thing that seems to be happening:

Venezuela newspaper El Nacional reported Tuesday that Venezuela’s Central Bank and Goldman Sachs are ready to sign an agreement to swap or exchange international gold reserves with a start date in October 2013 until October 2020.
The negotiated amount is equivalent to 1.45 million ounces of gold, valued at US$1.8 billion at today’s prices, which is to be deposited in the Bank of England with the transfers made directly to Goldman Sachs once delivery times are stipulated. Goldman Sachs will then pay U.S. dollars for the gold.

An adjustment of 10% will be made to the asset value as a hedge in case the international gold market price falls. The annual interest rate will be a combination of dollars with the call BBA Libor equivalent to 8%.

Do you know what this means? I do not (here's El Nacional's version, in Spanish but not significantly clearer), but it would seem to be a margin loan against the gold; i.e. something like:
Venezuela is borrowing about $1.6 billion from Goldman for seven years.

Venezuela is collateralizing that borrowing with gold worth $1.8 billion at today's prices (i.e. it's 90 percent of the value of the gold; that's the 10 percent haircut), and it's posting that collateral somewhere Goldman can get it (the BoE).

The collateral will be subject to margin calls as the price of gold increases or decreases.5
Venezuela is paying about 8 percent a year for this loan.6

So is that a good deal for Venezuela? It depends how you count but it's hard to imagine the answer is yes. I mean: Why would Goldman do it if the answer was yes? There are some other arguments below but that is surely the main one.7

Because, if true, this is not the most pristine deal you ever will see! (Goldman declined to comment.) I mean, one, Venezuela -- it inspires people to feel feelings, plus you might have some weird dynamics around actually getting them to post margin.8 Two, complex derivatives etc. -- more feelings, though despite the word "swap" here, my best guess about what is going on here is that it is really just a secured loan and so barely a derivative at all.

Three, ask yourself, what is the purpose of this trade? I won't tell you the answer, because I don't know, but it sure seems to be for Venezuela to get some money for its gold without "selling" it. Which is the sort of sleight of hand that, as a bank, in 2013, you might want to avoid. Unless, again, it pays well.

SOURCE - BLOOMBERG