Chavez to pull Venezuela's gold reserves out of Europe and US

Deutsche Welle, 19 Aug 2011

Caracas has benefited from a rally in gold
prices, but it could be at risk if prices fall

Venezuela's president will pull his country's international gold reserves out of the US and Europe and nationalize the gold industry. Still, those steps won't solve the country's serious economic problems, analysts say.

Venezuelan gold bars worth 7.7 billion euros ($11 billion) which are stored in banks in the United States and Europe will be removed by officials and either brought back to Caracas or taken to "allied countries" such as China, Brazil and Russia, according to President Hugo Chavez.

The recall is part of a strategy the Venezuelan president says will protect the country from the effects of the global economic crisis.

"We will put the gold back in the central bank," Chavez told cabinet meetings in a telephone conference this week.

Klaus Bodemer

But analysts say that there are domestic political reasons behind that recall decision and the move to nationalize the gold industry.

"Chavez sees that his international oil policies and the search for allies has had little success," Klaus Bodemer from the GIGA Institute for Latin American Studies in Hamburg told Deutsche Welle.

"At the same time, the 2012 election campaign is fast approaching and he needs money for that," he added.

Geopolitical considerations

Chavez pointed to the economic and financial crises afflicting the US and Europe, saying that putting some of his nation's gold and cash reserves in banks in China, Russia and Brazil is safer.

He said the "repatriation" of 211 of the 365 tons of Venezuelan gold is "a healthy measure for the country" and "an absolutely sovereign decision" that will benefit the Venezuelan people and economy.

Some 99 tons of Venezuelan gold worth 3.2 billion euros are stored in the UK, while the county has smaller amounts warehoused in Canada, the US and France.

"He sees the euro crisis and a possible recession in the US as proof of the instability of these regions," said analyst Bodemer.

"This recall is not going to solve the country's economic difficulties, but Chavez hopes he can take attention away from them."

Money troubles

Chavez has an election campaign to
think about, and finance

After two years of crisis, the Venezuelan economy is slowly beginning to bounce back. Still, its inflation rate of 27 percent is the highest in Latin America, and exploding food prices are hitting the poor, a key pillar of support for Chavez.

To lessen the pain, government guaranteed minimum-wage levels are being increased every few months.

Therefore, despite high oil prices, Chavez is experiencing a cash crunch, especially as oil production levels are declining. When Chavez came to power in 1999, production levels at the state oil company PDVSA were at three million barrels a day. In the 12 years since, that number has fallen to 1.8 million barrels.

Criticism of government expenditures has come from opposition politicians and industry, which has complained about stagnant investment levels and slow infrastructure development. In addition, however, dissatisfaction with state policy is also being expressed by Chavez' own allies.

While social welfare payments are already draining state coffers, Chavez will need to dip into them again for the upcoming election campaign.

"That's another reason for bringing the gold reserves back," said Bodemer. "Chavez would like to convert them into cash and use them in the campaign."

Oil production levels have been falling in Venezuela

Nationalization

This week, Chavez said that he will nationalize Venezuela's gold industry in a bid to stamp out illegal mining and boost international reserves.

"A law on nationalization of the gold production has been worked out," he said. "Let's convert it into our international reserves because gold is increasing in its value."

The country has significant gold reserves in the south-east where iron, bauxite and diamonds are also mined. The current euro crisis and economic turbulence in the US have driven gold prices up to above 1,200 euros per ounce.

"The nationalization of the gold industry will increase Venezuela's reserves, but it's problematic," said Bodemer. "Right now the price of gold is high, but it won't always be. And when it falls, Venezuela will be hit hard."

The analyst also sees a bit of schadenfreude behind Chavez' moves, saying the president wants to send a message to the US and Europe that he has lost trust in them and their troubled economies.

But the step could prove to be short-sighted, he added. Even if the BRIC states (Brazil, Russia, India and China) are playing an increasingly important role in the world economy, "they are still dependent on the northern industrial countries, and that includes China above all," he said. "They don't offer any long-term guarantees."

The gold transfers, according to the expert, are yet another aspect of Chavez' "anti-imperialistic doctrine," Bodemer said.

Author: Cristina Mendoza Weber (jam)

Editor: Rob Mudge

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