Venezuela sells its gold to pay the Bills
Venezuela has gone in a few months from being one of the major oil exporters in the world, to becoming the leading seller of gold on the planet.
With a virtually collapsed economy, the Latin American country has decided to sell a third of its gold reserves in the last six months in order to pay for expenses related to public spending and pay off part of its huge foreign debt.
So far this year, the Government of Nicolas Maduro has sold 131 tons of gold, 36% of its deposits compared to December, when the total amounted to 361 tons, according to the World Gold Council. This is the biggest selling of gold from a country in the last six months worldwide.
As oil sank, gold bounced to accumulate two-quarters of upward movement. In this period, the Venezuelan economy deepened its fragility.
Inflation soared 450%, according to data from the International Monetary Fund, and the lack of food and medicine generated tension between the authorities and the Venezuelan people.
To address the lack of liquidity, the Government of Maduro began selling bullion acquired during the years that Hugo Chavez was president.
The rebound in gold prices ensured higher profits compared to the previous months, but international observers are skeptical about the functionality of this operation.
The IMF estimates that the Venezuelan economy will contract by 8% this year. Moody’s considered it “very unlikely” that Venezuela will have enough liquidity to pay its foreign debt in the coming months.
Moody’s estimates the risk of a default by Venezuela at 60% of probability, as long as oil prices remain at current levels.
The black gold is 95% of the total income for Venezuela, and the drop in value was the origin of the macroeconomic problems of the country. Venezuela has seen its finances deteriorated after the fall of oil.
The country bought a lot of gold when oil was more expensive, but now it sells it to settle scores.
Consultants who study the market of precious metals have begun to look closely how Venezuela is selling its gold.
In late June, British Capital Economics produced a report stressing that only a recovery in oil prices, along with a debt restructuring with China, could “relieve some pressure on the economy of Venezuela”.
According to calculations by the Heritage Foundation, China has lent Venezuela around $85 billion since 2005. That money is included in the payments that Venezuela tries to make by selling its gold.
“Now they need liquidity and selling gold reserves is the easiest way to get the economy to stay aflot,” considers Simona Gambarini, an analyst at Capital Economics.
Asked if it is China that is buying gold from Venezuela, Gambarini explains that selling precious metal is an untransparent practice, but that she believes that the hypothesis is plausible, since China, along with Russia, is one of the few countries that in recent years has increased its gold reserves.
Venezuela remains a country dependent on oil. The country depends 95% on its oil exports, and unless world production of barrels is reduced, for example, following an agreement of Arab producers, selling gold itself will not be enough to alleviate the economic problems from the country.
“The Venezuelan government faces a difficult choice between further reducing imports or defaulting on its debt. Opting for the first pathway is what is leading the country to the brink of collapse,” she concluded.