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Venezuela's central bank is considering lending part of its gold reserves in exchange for dollars, according to the report Reuters based on sources within the government. The country was already experiencing very high inflation, but the drop in oil prices over the past six months has caused the country's economy to go downhill even faster.
Venezuela needs dollars to import goods from abroad and is highly dependent on crude oil exports to do so. Now that this revenue stream has almost halved, the country has to print more and more money to pay all the burdens. As a result, inflation is skyrocketing, shops can no longer replenish stocks, and people are taking to the streets to express their displeasure.
To get some extra dollars into the treasury, the central bank is considering exchanging 1.4 million troy ounces of gold (43.5 tons) for dollars. This swap construction brings to the current Gold price about $1.5 billion. It is a bandage for the bleeding, because it does not solve Venezuela's structural economic problems.
According to Reuters' sources, the central bank is said to be in talks with Bank of America and Credit Suisse. Both banks would be willing to watch Venezuela's gold for four years. At the end of this term, the central bank will be the first to have the right to buy back the gold. It is striking that the central bank of Venezuela has to pay interest on this dollar loan of $1.5 billion. This interest rate is a kind of compensation for the risk that banks run if gold falls in price during this four-year period. During this agreement, Venezuela will still be allowed to count the gold among its reserves.
Since the outbreak of the financial crisis in 2008, the then president of Venezuela, the late Hugo Chavez, has had gold brought back from London with a great show of force. With armoured cars and accompanied by heavily armed security, an estimated 160 to 180 tons of the total gold reserve of about 360 tons were driven from the airport to the vault of the central bank. Now that the country itself has been hit by a severe crisis, it has to pawn part of its gold to be able to pay for the import of goods.
Venezuela is not the first South American country that wants to swap part of its gold reserves with a bank. Last year, Ecuador pawned gold for dollars through the American bank Goldman Sachs for the same reason.
The late Hugo Chavez liked to have his picture taken with gold
