Many people have been wondering what ever happened to Hugo Chavez's demand for physical delivery of all Venezuelan gold held in overseas banks. Reuters is reporting that the scheduled deliveries will start on November 5th. According to the Venezuelan government, the gold will be transported by ship. Hmmm ...
It is very unlikely that small easily transported, high value items like gold, would be transported by ship in the modern age of air transport. The Venezuelan gold will surely travel by air. Most likely, it will travel somewhere in the neighborhood of November, but it won't be on the timetable released by the Venezuelan government. No one can blame Venezuela, its banks, or its insurers if they are being intentionally deceptive about this. There are surely a lot of people who would like nothing more than an opportunity to make careful plans to hijack gold in transport. According to Reuters, Venezuela's gold is going to be traveling all the way from the U.K., USA, Canada, France and Switzerland.
Among the various gold related activities of Hugo Chavez's Venezuela, repatriation of the nation's gold is one of the few smart things he's done. He has also banned the export of gold out of the country, which is a very bad thing to do. But, banning gold exports is no worse than what U.S. President Richard Nixon did when he unilaterally closed the "gold window" and violated U.S. monetary treaty obligations to the rest of the world. It is certainly less wrong that the actions of US President Franklin Roosevelt who unconstitutionally seized gold from American citizens under penalty of a $10,000 fine (huge money in those days) and a lot of prison time. But, Chavez is also actively engaged in activities that will, in the longer run, cost his government dearly, and destroy gold production. Chavez's government demands 55% of any new mining venture and now imposed a 13% royalty rate.
Chavez has nationalized the entire gold mining industry. Canada's Crystallex International Corp. (KRY) and Spokane, Wash.-based Gold Reserve, Inc. (GRZ) have taken their case to the World Bank’s International Centre for Settlement of Investment Disputes. Venezuela's revenues come mostly from oil exports, and any one of the vessels carrying oil on behalf of its government-owned oil monopoly will be subject to seizure and sale. It won't be hard to satisfy the judgment. Most of the technical expertise that knows how to most efficiently exploit Venezuela's gold reserves comes from abroad. But, obviously, there are few foreign mining companies who will be eager to do business in Venezuela under these conditions. Gold production will decline sharply.
At any rate, because it is among the first to demand physical delivery, Venezuela is going to get the gold it already owns. The bullion banks will be able to meet a demand for a few hundred tons, if they have the help of western central banks, and I am sure they will. But how many more secondary nations are going to demand the physical possession? Thousands of tons of gold, "stored" in New York and London, belong to them. A lot of it, like Mexico's gold, is probably in non-allocated "storage", which means it doesn't necessarily exist in tangible form. According to the testimony of a bullion bank consultant, Jeffrey Christian, given at a CFTC hearing on March 25, 2011, bullion banks define "physical" gold differently than the rest of us. They store only 1 ounce of gold in their vaults, for every 100 ounces they sell.
So, what happens now? Will Mexico eventually demand delivery of the 110 tons of physical gold that they "bought" from one or more London bullion banks, a few months ago? They certainly should if they are to fulfill their goal of having an asset that has no counter-party risk. How about Kazakhstan? Thailand? How many other nations will now demand repatriation of the thousands of tons of gold western bullion banks are "storing" for them? If nations begin to insist on physical delivery, western central bankers may be called upon to empty out their sovereign vaults to bail out the bullion banks. Even if only a few emerging market nations demand physical gold, it may put intense upward pressure on the price of gold over the next year or two.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.