Chavez’s 70% Gold Bet Unravels as Reserves Plunge: Andes Credit – by Charlie Devereux & Corina Pons (Bloomberg News – July 4, 2013)

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The bet on gold that former Venezuelan President Hugo Chavez made in the final years of his life is collapsing at the wrong time for his country.

Chavez, who argued that Venezuela should move away from the “dictatorship of the dollar,” stockpiled more than 70 percent of Venezuela’s foreign reserves in gold by 2012, the highest percentage among all emerging-market countries and more than 50 times that held by neighbors Colombia and Brazil, according to the World Gold Council.

After rewarding Venezuela with a rally of almost 400 percent in the past decade, gold has tumbled 25 percent this year, helping drive the central bank’s reserves to an eight-month low and compromising the government’s ability to repay foreign debt. The yield on Venezuela’s dollar-denominated bonds has risen 62 basis points, or 0.62 percentage point, to 11.84 percent in the past month, compared with an average increase of 57 basis points for other countries in Latin America.

“Venezuela’s reserves have taken a big hit,” Francisco Rodriguez, an economist at Bank of America Corp., said by phone from New York. If current gold price levels continue, “then you will see an increase in perception that Venezuela’s capacity to pay is weakening.”

Default Swaps

Central bank reserves fell below $25 billion last week from as much as $29.9 billion last year even as Chavez’s handpicked successor, Nicolas Maduro, has cut dollar supplies for importers, creating shortages of everything from toilet paper to butter. Standard & Poor’s reduced Venezuela’s credit rating to its lowest in eight years last month as the shortages worsened and consumer prices rose at the fastest pace in Latin America.

The cost to insure Venezuelan debt against non-payment for five years using credit-default swaps has climbed 377 basis points this year to 1,024 basis points. The cost was little changed today at 1:34 p.m. New York time.

The 970 basis-point premium that investors demand to buy Venezuelan dollar bonds instead of U.S. Treasuries is the second highest in emerging markets after Argentine debt, according to JPMorgan’s EMBI Global index.

The rally in gold had enabled Chavez, who died of cancer in March, to siphon off $45.8 billion from the central bank to an off-budget development fund since 2005 while keeping reserves above $25 billion for most of the period, according to the Finance Ministry. The fund, known as Fonden, invests in infrastructure projects.

The central bank didn’t respond to an e-mail seeking comment.

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