JOHANNESBURG (miningweekly.com) – The prospect of the Venezuelan central bank disposing of more of its bullion holdings in the years to come will likely have a dampening effect on gold prices, commodities research and consulting firm CPM Group managing partner Jeffrey Christian says.
The Venezuelan central bank allowed a $1.7-billion swap with Deutsche Bank to expire in October.
“The short-term [gold] price will be affected negatively by investors' concerns over this gold coming onto the market and the uncertainty of [its] timing. The effect will be modest, but it should reduce gold prices by more than a few dollars from where they otherwise might have been,” he said.
The bank's gold reserves dropped from 11.8-million ounces in 2015 by about half to six-million ounces earlier this year. It is not clear how much of that was sold outright and how much of it was swapped. Given the Deutsche Bank report, there are other swaps or sales that have taken place.
The Deutsche Bank will most likely sell it off at opportune times, probably in pieces, says Christian, adding that the market is unlikely to see 1.3-million ounces of gold sold in one chunk, and Deutsche Bank would have the luxury of being able to work itself out of that position. Some of the gold may well be sold to clients of Deutsche Bank Asset Management operations.
Further, it is not clear how much gold the Venezuelan central bank has out of swaps and how much it still holds outright.
It is likely that other swaps will be allowed to expire, since the bank needs the money and does not have the foreign exchange reserves to unwind the swaps.
“Additionally, letting the swaps expire gets the bank more cash. This is because the bank only gets around 70% of the dollar value of the gold, reflecting gold liquidity and price volatility issues. If the swaps expire, the bank gets the differential. In the case of the Deutsche Bank swap, the bank initially got $1.2-billion in cash,” Christian explained.
To unwind the swap, the central bank would have had to return the $1.2-billion and possibly pay some additional charges. By letting the swap expire, the Venezuelan central bank gets the $500-million differential between the value of the gold it had swapped earlier and the cash it had gotten at the outset of the swap.
All the gold transactions, swaps and sales reflect the insolvency of the Venezuelan government, Christian stated.
“Any gold that has been swapped – perhaps as much as another 4.7-million ounces – will ultimately hit the market. The remaining gold the government has, whether it is six-million ounces, 4.7-million ounces, or more, also should be expected to come into the market at some point over the next few years, assuming this government remains in power and does not reverse its economic course,” he adds.
The probability that the Venezuelan central bank will dispose of more gold over the next several years will negatively impact on the gold price.
“That is a large amount of additional gold for the global market to absorb.
“The biggest risk comes from direct sales by the Venezuelan central bank, which could be clumsy and disruptive on the market, hitting prices when they are made. They also could scare the market if and when they are made and seen in the market.
“The silver lining for gold is that these sorts of political developments tend to stimulate interest in gold from investors in the longer run,” avers Christian.