Venezuela Says Goodbye To Her Gold Reserves

Ronan Manly:  Five months ago in my article “Venezuela’s Gold Reserves – Part 2: From Repatriation to Reactivation“, I concluded that:

“given the deteriorating state of Venezuela’s international finances and international reserves at the present time, it may be sooner rather than later before Venezuelan gold could be on the move again out of the country.

One thing is for sure. Gold leaving Venezuela on a flight back to London, New York, or elsewhere, will not get the fanfare and celebration that was accompanied by the same gold’s arrival into Caracas a few short years ago.“

Those predictions now seem to have come to pass because there is now evidence that the Banco Central Venezuela (BCV) shipped gold out of Maiquetía Airport (Caracas international Airport) in early July 2015, and there is also separate evidence that Venezuela’s official gold reserve holdings, which are managed by the BCV, dropped by 60 tonnes between March and April 2015. These are two distinct events.

The 60 tonne drop in gold reserves in March-April

On 28 and 29 October respectively, Bloomberg and Reuters filed reports highlighting a decline in Venezuela’s gold reserves through the end of May 2015. The Bloomberg report is here, the Reuters report is here.  Both reports merely focused on the currency value of Venezuela’s gold reserves, and neither report addressed the critical metric that is needed in any discussion of central bank physical gold dealings, i.e. quantity or weight of gold. Furthermore, neither Bloomberg nor Reuters seems to grasp how the BCV values its gold reserves.

From Reuters:

“Venezuelan central bank gold holdings declined in value by 19 percent between January and May, according to its financial statements, likely reflecting gold swap operations and lower bullion prices…

..Central bank financial statements posted this week on its website show monetary gold totaled 91.41 billion bolivars in January and 74.14 billion bolivars in May“

From Bloomberg:

“The value of the central bank’s bullion holdings fell 28 percent at the end of May from a year earlier, while the spot price for the metal declined just 12 percent.”

The problem with the above is that comparing the change in value of Venezuelan gold reserves over two points in time relative to the spot price change of gold over those same two points in time is not the correct approach because the BCV does not use the latest market price to value its gold holdings. The BCV uses a nine month rolling average valuation price methodology.

Without knowing the correct valuation price used at each month-end valuation point, the quantity of gold being valued cannot be calculated accurately. Conversely, doing some simple research (looking up the footnotes to the BCV accounts) and a few quick spreadsheet calculations gives a very accurate estimate of quantity of gold held at each month-end valuation point. Perhaps next time the major financial news wires can go the extra mile.

[Note: The Spanish translations in this article use a combination of Google Translate and Yandex Translate, and some instinctive re-sequencing.]

Valuation of monetary gold by the BCV

The BCV’s valuation methodology for monetary gold holdings, taken from 2014 year-end accounts, is as follows:

“Oro monetario…se valora mensualmente utilizando el promedio móvil de los nueve (9) últimos meses del fixing a.m. fijado en el mercado de Londres,

“Monetary gold…is valued monthly using the moving(rolling) average of the last nine (9) months of a.m. fixings set in the London market“

Because the BCV holds a small percentage of its monetary gold in the form of gold coins, the valuation methodology also addresses how to value the coins, which, although not material to this discussion, is as follows:

“..más un porcentaje del valor promedio de la prima por el valor numismático que registren las monedas que conforman este activo.”

“..plus a percentage of the average value of the premium for the numismatic value of the coins which comprise this asset”

(Note 3.3. to the 2014 BCV financial accounts)

To check this moving average calculation and how it works, you can apply it to the 2014 year-end monetary gold valuation figure and make use of note 7 in the same set of accounts. Note 7 states:

“Nota 7 – Oro monetario

Al 31 de Diciembre de 2014, las existencias de oro monetario se encuentran contabilizadas a un precio promedio de USD 1.257,80 por onza troy y totalizan Bs. 91.879.349 miles, equivalentes a USD 14.620.691 miles y su composición y valoración se corresponde con los criterios descritos en la nota 3.3”

“At December 31, 2014, the stock of monetary gold is recorded at an average price of USD 1257.80 per troy ounce and total Bs. 91,879,349 thousands, equivalent to USD 14,620,691 thousands, and its composition and valuation corresponds to the criteria described in Note 3.3”

(Note 7 to the 2014 BCV financial accounts)

The Venezuelan accounting convention of USD 14.620.691 miles just means USD 14.6 billion.

361 tonnes of gold at year-end 2014

As at 31 December 2014, in its balance sheet, the BCV valued its monetary gold at Bs 91,879,349,000 (bolívaresfuertes). Technically, since 2007, the Venezuelan currency is called the bolívar fuerte (strong bolivar) since at that time the Venezuelan government re-based the previous inflation ravaged bolivar and re-set 1000 old bolivars = 1 ‘strong’ bolivar. The updated name is in retrospect ironic given that the Venezuelan currency is now one of the weakest fiat currencies in the world as the Venezuelan economy begins to experience out-of-control price inflation.

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