Venezuela Pledges 1.4 Million Ounces Gold as Collateral in CitiBank Deal

Santa Elena, May 4th, 2015. (venezuelanalysis.com)- Venezuela has pledged 1.4 million ounces of gold in exchange for a $1 billion loan from CitiBank, according to sources.

At the end of April, Caracas newspaper El Nacional published a vague report on the deal, which has since been corroborated by the former director of Venezuela’s Central Bank and fleshed out by inside sources reporting to Reuters and the Financial Times.

Though the exact terms remain unclear, the deal will inject foreign currency into the country’s ailing economy.

After the 2008 global recession, Hugo Chavez began to move assets away from the dollar until the majority of Venezuela’s reserves were held in gold. In 2011, the late socialist leader moved most of the metal from European to Venezuelan vaults, to further shield the country from market instability.

But instability has reached Venezuelan shores, in the form of plummeting oil prices and runaway inflation spurred by a fragmented Forex model and a booming black market.

The OPEC nation is also due to pay an estimated $8 billion in principal and interest payments throughout the remainder of 2015, according to Barclay’s. 

Since late 2014, Wall St. analysts have frenetically labeled the Bolivarian government as being at high risk for default- second only to Ukraine, said Moody’s Atlantic.

So far, however, president Nicolas Maduro has made good on the country’s significant debt payments. 

Under the CitiBank deal, Venezuela will receive $1 billion in cash for gold that is worth nearly $1.7billion by today’s prices- about 60% of its value. The government will also be required to pay interest on the loan. However, people familiar with the matter affirm that the gold will stay in Venezuelan vaults and its current value will continue to appear on the Cental Bank’s balance sheets- an advantage that Goldman Sachs denied the country in earlier talks.

According to the latest figures from the World Gold Council, Venezuela holds almost 377 tons of gold- the world’s 16th largest gold reserves. 

Some sources say CitiBank now holds the title to the gold, and that Venezuela will have the right of first refusal to buy it back after four years, while others believe the title is still in Maduro’s hands. In either case, economists agree that CitiBank is betting on gold prices to rise, and expect a windfall, plus interest, if and when Venezuela is ready to regain it’s collateral. 

Still, Bank of America analyst Francisco Rodriguez believes the gold swap was the “logical” course of action for Venezuela’s contracting economy. Rodgriguez said the coordinated liquidation of savings and cutting of imports are necessary in the wake of halved oil prices, which represent 97% of the country’s cash earnings.

Once oil climbs back up to $70 a barrel, Rodriguez advised, Maduro should redesign the Developmental Fund (Fonden) and consolidate assets, in order to service its debts proportionately. This week, Venezuelan crude opened at $55 a barrel, in a continued upward crawl from the $44 average since US shale oil inundated the market last October.