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Venezuelan gold mining companies
had until recently been forced to sell 50% their gold production
to the government for their
reserves. This was increased last month to 100%.
It accompanied President Chavez’s nationalization
of the mining industry.
This lays the country open to the seizure of foreign-based assets belonging to Venezuela, including all its gold. To guard against this Chavez has ordered that all the country’s
gold held in foreign vaults be repatriated
back to the country. The tonnage involved is 365 tonnes. This is a huge amount. While it seems
political opportunism guided the decision, it was an excellent investment move. In the ground inside Venezuela sits around 1,000 or more tonnes of gold, which
over time will take Venezuela’s gold reserves
above those of Switzerland, once it is mined.
Other Countries Following
This is a small
country, whose exports are 95% oil.
It can sell these to any nation including China, ignoring any
Western consequences. At
the same time it is switching out of
the euro, pound and the U.S. dollar into the BRIC nation’s assets. In doing so it
is cutting itself off from a decaying flat growth, debt-bound developed world and investing in growth and gold.
This leaves the country’s
reserves a growing
portfolio, dependent for its
cash flow on the evergreen
cash cow, oil. Small
countries may be seeing the wisdom of Venezuela’s reserves. They may be
tempted to follow that example.
We said this
in one of our daily
reports…
v Kazakhstan, a relatively small producer, announced that its own local gold production would now be
bought by the government
for its gold reserves.
v We have long believed that China, to a greater or lesser extent, has been doing this for some years now.
Its local production is rising by the year and it’s the world’s largest gold producer now at well
over 300 tonnes.
v Russia has been buying local and foreign production as well for years now.
Taken individually the tonnages being talked of may not individually have a huge effect
on the gold price; taken collectively, however, a different story emerges. At this moment in time we are talking of the above countries local production in excess
of 550 tonnes in total. When you
consider that world gold
production is around
3,000 tonnes per annum, 550 tonnes is 18% of annual gold
production. Is this the end of the story? Who can tell, but the pattern is tempting to all gold-producing nations when the
nature of their reserves is too dependent
on the U.S. dollar, a currency in decline.
What Next?
Some may see the
moves of the small countries to be
consistent with the political
unpopularity of the nations involved.
Some may look at the larger countries doing this as simply diversifying their reserves. From a prudent, responsible aspect such moves ensure a good supply of gold into reserves at market prices
without causing the gold price to react to every purchase when discovered. The net effect is simply
to lower the volume of supplies to the world market. Please note too that the four gold producing nations we have mentioned are seeing a growth in their production on
an annual basis. Many other producers are seeing their gold production decline. This must result in
the percentage of gold production going straight into a nation’s reserves rising while the amount available to growing demand is declining.
Imagine if Australia or South Africa followed suit. With the price of gold rising and the
value of the U.S. dollar falling, it makes good financial sense to hold onto the gold being produced locally. Imagine if Britain had not sold its gold at the lowest price seen in nearly 35 years [$275] and held onto it until now. The six-fold rise in its value would be a welcome development in these darkening economic days.
It’s getting increasingly
difficult to give reasons why gold-producing nations should not retain their locally-produced gold and even
more difficult to explain
why they should sell that
gold for U.S. dollars.
Conditions Compel
Leading Nations to Follow
Will other nations follow suit? We think that
they will, but would hesitate to say when or who.
Central Bankers feel more advantage
to paper money as do politicians.
Gold comes with a monetary discipline that is anathema
to them. But we are sure that where a central banker finds his nation dependent on the hard currencies
of the world, the temptation may
prove far too much.
But even the U.S. and Canada –should
their currencies lose importance and position in the global economy—will no doubt follow suit. When? Certainly the tipping point will be when the Chinese
Yuan ascends the stage as a global reserve currency or when oil producers
accept most currencies in payment of their oil. Or it may be
when the stimulant of money creation
becomes too much for the surplus nations to accept.
We are closer than you think.
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