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OK. Let the fun begin! Yesterday Venezuelan
President Hugo Chavez announced that planned to nationalize his countries
gold mining industry in an attempt to increase its international reserves.
This is not an unprecedented move. He has already nationalized the banking
industry, telecommunication companies, the oil fields, the producers of power
for the country and millions of acres of farm land. President Chavez said
that the nationalization of the gold industry was to protect the people of
Venezuela from having their gold fall into the hands of the mafia and
smugglers.
It
was reported in The Wall Street Journal that Mr. Chavez said “we
don’t only have oil wealth; we also have one of the largest reserves of
gold in the world so we might as well convert it into our international
reserves because gold is increasing in value.”
President Chavez also released documents
showing that he plans to transfer billions of dollars in cash reserves held
abroad to banks in China, Russia and Brazil. The documents also showed that
he planned to move 211 tons of gold it has stored abroad and values at 11
billion to the Central bank in Caracas, where the government keeps its
remaining 154 tons of bullion.
While
Venezuela is a relatively minor player on the world stage, this could be a
big game changer here in the United States because one of the banks that
holds 10.6 tons of Venezuela’s gold is none other than JP Morgan. In a
recent audit of JP Morgan’s holdings it was reported that they held
338,303 ounces of gold or roughly 10.6 tons. While this is a modest size
deposit it is sure to cause some jitters at JP Morgan as they scramble to
find the replacement gold which has already been pledged about 100 times
across various paper markets to ETF’s like GLD. Oddly I had a
conversation with one of my readers yesterday about his concerns of holding
ETF’s that “lease” the gold that he purports to own. I will
certainly be keeping an eye on gold in the illiquid after market and pre
market. The long overdue scramble for delivery may be about to begin.
“What you do in the Dark, You See in the Light.”
According
to Andre Agapov the CEO of Ruscoro Mining, which is based in Toronto he said
he wasn’t worried about the announcement and he claimed to be a friend
of President Chavez. He said he believed President Chavez’s words were
directed at the many illegal mining operations which operate under the radar
and use environmentally damaging practices like mercury dumping. Either way
this is a wakeup call to ETF’s like GLD because President Chavez has
proven that at times he is not completely forthcoming in all of his dealings.
The fact
is that Venezuela’s gold mining industry does not play a major role in
the country’s economy. While Venezuela is believed to have Latin America’s
largest gold reserves, the country’s oil industry is the
country’s major industry.
The
reality is that the gold fields are located in remote jungle areas near the
Brazilian boarder and have been dominated by small, illegal wildcat
producers. It’s the Wild West. There are no police, roads or authority.
The industry is largely dominated by smugglers.
There
have been attempts to lure real gold producing companies but to no avail.
While the government sings the song of clamping down on the smuggling of gold
into neighboring countries, critics say that there has been little progress
made.
The key
to this essay is that whether President Chavez was posturing or is for real,
it is time for ETF’s like GLD to get their house in order. Because if
President Chavez does call JP Morgan’s bluff ETF’s like GLD will
come crumbling down like the house of cards it is built on.
Tomorrow
should be a very interesting day as we see if this was more of President
Chavez’s pointless posturing or if this time he is for real.
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