Gold Fire Sale From Venezuelan Default


Venezuela defaults, and Gold is down?

If Venezuela defaults, the likelihood of Gold prices dropping before, during, and slightly after the default announcement are large as the lender who is about to get collateral Gold instead of cash is "more likely to sell Gold given to him; or at least hedge the physical with futures."

The truth is unknowable in certitude, but absent other factors the reason for this explaining this seeming inconsistency (worthless FIAT currency and lower gold prices) is simple. We've discussed it here before.

  1. Venezuela has Gold
  2. They need to raise cash to pay debts
  3. The have gold collateralized loans to be repaid
  4. If they wish access to global credit markets they need to get proper with creditors
  5. Gold is then sold by creditors, Venezuela itself, or bullion dealers selling in spec in anticipation of Venezuelan related sales

Here is our take last month on what could and likely did happen once the Venezuelan Gold swap deal went into arrears last month

From: Is Venezuela’s “Cash 4 Gold” Deal Why Prices Dropped?

We cannot help but think the Venezuela gold swap “lapse” is somehow partly responsible in the market’s move lower over the last few days, if not the last weeks. The basis for that is simple but only conjecture on how markets digest defaults on collateralized loans.

And let’s face it, by the time it is disclosed, the creditor knows and is out of risk if an actual default occurs. Mortgage lenders don’t advertise their loans defaulting. Why would  anyone think this is fresh news to the Gold community? 

From Reuters: Venezuela this month allowed a $1.7 billion gold swap with Germany’s Deutsche Bank AG (DBKGn.DE) to lapse, according to an opposition legislator who said it weakens the balance sheet of the crisis-stricken OPEC nation’s central bank. Through the operation, Venezuela had received $1.2 billion in cash in exchange for putting up $1.7 billion worth of gold in guarantee, part of efforts to improve the liquidity of foreign reserves amid heavy foreign debt payments and low oil prices.

Right off the bat you can see that it’s bad to need cash when you have gold. The bank will not give you 100% swap value ever! During the German hyperinflationary episode of the 1920's people were burning valuable pianos for firewood. Ignoring all other  possible reasons, and there are other factors at play here, Gold is in firesale mode as its acceptance as money is growing, but its use as a facilitative currency is restricted by international trade rules among other things.

Continuing from our predictive analysis

When a debtor  defaults on a collateralized loan, the collateral is passed to the lender. A simple example would be if you defaulted on your mortgage, the bank would take possession. Banks aren’t in the real estate business and will sell that home to stay liquid and get that cash back to work other deals.

If, and it’s a big if as there are many moving parts to these deals, Venezuela does default on a gold swap loan, then the effect would ultimately lead to the lender taking possession of the asset pledged, in his case Gold. And that makes the lender who is not interested in being long gold and can find better, lower lying fruit for his cash, more likely to sell Gold given to him; or at least hedge the physical with futures.

This is all conjecture at this point. But we’re pretty comfortable with our assessments here of what could or did happen in the past few weeks. A little reverse engineering says odds are Gold sold off on a leaky boat in someone’s port. It is notable that we have seen this before when other bullion banks bought sovereign gold from central banks.

Gold prices dropped before the sale (BOE in 1998-99) not just because it was being sold, but also because that it would be sold was leaked. And when that happens, the price drops and the seller must sell at a price to the bullion dealer lower than when he first got the idea to sell his nations gold. No doubt the BOE sales were irrational. Central banks weren’t that sharp on handling their deals in those days. 

So there is precedent for Gold dropping when it transfers hands on a default or any other type of irrational sale. But not all credit/ gold based defaults are bearish. No different than storing your own wealth in gold, managing your finances poorly, then needing to get cash to buy bread.

What should be noted is how much Gold drops for this reason, as opposed to how much it dropped in the past during other fire sales. If it drops less relatively speaking, then you have some insight into the pen- up demand from short bullion dealers or central banks not breaking ranks to cover their own a@@es.

It's also like being right and  being early in trading terms.  You bet too big, your advisor ( bank lender, or broker), enables it, and you puke before the rally.

Good  luck



Trump wraps up his big Asia trip, while the world’s most powerful central bankers gather in Frankfurt, and Venezuela goes into default.



Venezuela defaults

S&P Global Ratings declared Venezuela to be in default after it missed two interest payments on its debt. Before the announcement, the Latin American nation held a grand gathering with creditors in Caracas, where bondholders were given a red-carpet welcome but no concrete restructuring proposals. On Tuesday, the International Swaps & Derivatives Association will reconvene to consider whether delayed payments by state oil producer Petroleos de Venezuela SA will trigger default-insurance contracts. 

Asia tour ends

President Donald Trump hailed progress toward his goal of reducing the U.S. trade deficit as he ended his swing through Asia, but questions linger about how much he actually achieved. He said on Twitter he will be making a “major statement” when he returns to Washington, where the debate over tax reform trundles on. The House’s chief tax writer says he’s confident its bill will pass a vote that could come as early as Thursday. Meanwhile, Attorney General Jeff Sessions will be pressed by House Democrats today on fresh questions about Russian contacts with Trump’s presidential campaign.

Central bankers gather

A conference featuring the world’s most powerful central bankers kicked off in Frankfurt with panelists Federal Reserve Chair Janet Yellen, the euro zone’s Mario Draghi, and Japan’s Haruhiko Kuroda.  The topic of the get-together – monetary communication – should be of interest to Fed Chair nominee Jerome Powell, who has publicly acknowledged that there are shortcomings in the interest-rate dot plot the Federal Open Market Committee releases four times a year.

Data on a roll

Germany’s gross domestic product came in above estimates in the third quarter, underpinning the recovery narrative across the euro area. The euro climbed against its G-10 peers and traded 0.5 percent higher against the dollar at 6:04 a.m. Eastern Time. In the U.K., cost of living pressures continue to weigh on consumer sentiment, with inflation holding at a 5 1/2-year high in October, as cheaper fuel offsets rising food price. The pound fell as much as 0.3 percent after the release. 

Markets fall

Overnight, the main Asian equity gauges declined as data showed China’s economy moderating. The MSCI Asia Pacific Index retreated 0.3 percent, with Japan’s Topix index closing 0.3 percent lower and the Nikkei 225 Stock Average little changed. In Europe, the Stoxx 600 Index was 0.3 percent lower at 6:25 a.m. and the FTSE 100 Index added 0.2 percent as the pound slipped. S&P 500 futures were down 0.1 percent, the 10-year Treasury yield was at 2.40 percent, and gold was 0.3 percent lower. 


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