Venezuelan President Hugo Chavez has order his country’s central bank to repatriate $11 billion of gold (NYSE:GLD) reserves being held by developed nations around the world. Of Venezuela’s 365 tons of gold reserves, 211 tons are held by banks in the U.S., Europe, Canada (NYSE:EWC), and Switzerland, and Chavez says they will now progressively return the bars to Venezuela’s central bank vault.
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Some of the banks holding Venezuelan gold include the Bank of England, JPMorgan Chase (NYSE:JPM), Barclays Plc (BARC), and Standard Chartered Plc (NASDAQ:STAN). “We’ve held 99 tons of gold at the Bank of England since 1980. I agree with bringing that home,” said Chavez yesterday on state television. “It’s a healthy decision.”
The Venezuelan government currently depends on oil for 95% of its export revenue, and Chavez is looking to diversify as oil prices continue their downward spiral and gold prices continue to top record highs, rallying 28% this year. Venezuela’s reserves were worth $28.6 billion as of August 16. Venezuelan Finance Minister Jorge Giordani says that the weak U.S. dollar and European sovereign debt crises mean Venezuela’s savings are no longer safe. Chavez also hopes to invest in emerging markets (NYSE:EEM) like Brazil (NYSE:EWZ), India, China (NYSE:FXI), Russia, and South Africa.
Chavez signed a document Wednesday that authorized the transfer of Venezuelan gold (NYSE:GLD) reserves. Venezuela has about $7 billion of gold in its own vaults, and about $6.3 billion in liquid reserves, 59% of which are held in Switzerland, 18% in the U.K., and 11% in the U.S.
Some are concerned that the repatriation of gold reserves could further cloud transparency of government holdings, which could hurt bond prices. Venezuela has the highest borrowing costs of any major emerging market (NYSE:EEM), and the extra yield investors demand to own Venezuelan bonds instead of U.S. Treasuries climbed 0.43% this morning to 1,233 basis points as benchmark prices fell 2.28 cents on the dollar.
The threat that Chavez could use the gold (NYSE:GLD) for politically motivated spending ahead of next year’s presidential elections is also a factor in negative public opinion of the move. “It is clear that the motivation appears mostly to fit a political agenda to align with strategic political partners and retaliate against the recent U.S. sanctions on fears that assets might at some point be frozen,” said RBS Latin American analysts Felipe Hernandez and Siobhan Morden.
Chavez also announced Wednesday that the gold (NYSE:GLD) industry would be nationalized in order to prevent illegal mining and to build up reserves. There are currently 17 arbitration cases pending against Venezuela in the World Bank’s International Centre for Settlement of Investment Disputes, at least three of which are over mining ventures. Gold Reserve Inc. (AMEX:GRZ), located in Spokane, Washington, is seeking $2.1 billion in damages after their gold and copper project in Venezuela was seized by the government in May 2008. Doug Belander, president of Gold Reserve, is not surprised by the move, saying that he believed that the Venezuelan government’s “objective all along was to take over the entire industry.”