Venezuela's decision to retain 100% of its gold production could turn out to be a rather prudent investment decision and one other nations come to copy, says Julian Phillips, and it could have a cumulative impact on global supplies of the metal
Posted: Monday , 05 Sep 2011
jOHANNESBURG -
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...
- Kazakhstan, a relatively small producer, announced that its own local gold production would now be bought by the government for its gold reserves.
- 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.
- 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 say 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.
