The Battle for Venezuela’s Gold Serves as a Lesson in Counterparty Risk
He who controls the gold makes the rules. That old adage applies aptly to the present crisis in Venezuela.
An international battle for control of Venezuela’s gold is currently underway. At stake is the country’s political future – and with it, the global market for its immense oil reserves.
In a desperate effort to cling to power, Venezuelan strongman Nicolas Maduro has been depleting his country’s gold reserves.
The oil-rich nation once had gold reserves of over 160 tons. But in recent months, Venezuela has sold off dozens of tons of gold to allies such as Turkey, United Arab Emirates, and Russia in exchange for euros and other globally recognized currencies.
Nobody in their right mind wants to conduct international business in the Venezuelan national currency, the bolivar. Even ordinary Venezuelans have largely ditched the bolivar for cryptos and other alternatives as inflation rates in the troubled country top 1,000,000%.
Even as the Venezuelan government was busily hyperinflating its currency and ripping off its people, it still held gold in reserve in order to retain the confidence of foreign creditors including Russia and China. Ordinary Venezuelans couldn’t redeem their rapidly depreciating bolivars for gold, of course. But foreign creditors could effectively demand payment in gold through the conversion of Venezuela’s gold into their preferred currencies.
For several months, President Maduro has been trying to retrieve some $1.2 billion worth of official gold being held in Bank of England vaults.
Fearing reprisals from the United States, which has imposed far-reaching economic sanctions on Venezuela, the Bank of England stalled, gave excuses, and ultimately refused to return Venezuela’s gold.
The Maduro government charges that its gold has been illegally confiscated, in contravention of internationally recognized norms.
Maduro’s U.S.-backed rival, Juan Guaido, is demanding that the Bank of England hand over the gold to him instead!
Guaido is an inexperienced and until very recently obscure political figure in Venezuelan politics. Nevertheless, he has been recognized by the United States as the interim President of Venezuela – even though he hasn’t actually formed a government or removed Maduro from power.
If Guaido gets control over the country’s gold, it could be game over for Maduro. His international creditors would likely begin abandoning him.
U.S. officials have offered Guaido accounts through the Federal Reserve Bank of New York to help him establish financial legitimacy. Perks such as free checking could certainly come in handy when trying to establish a new government!
At the same time, the U.S. government is trying to choke off Maduro financially by targeting anyone who handles Venezuelan gold. Senator Marco Rubio warned United Arab Emirates officials on Thursday that transporting Venezuelan gold would subject them to U.S. sanctions.
National Security Advisor John Bolton stated, “My advice to bankers, brokers, traders, facilitators, and other businesses: don’t deal in gold, oil, or other Venezuelan commodities being stolen from the Venezuelan people by the Maduro mafia. We stand ready to continue to take action.”
That action by the U.S. may even include a military invasion of Venezuela.
Neo-conservative interventionists within the Trump administration are bent on regime change by any means necessary. Secretary of State Mike Pompeo appointed Elliott Abrams – a staunch opponent of Donald Trump and his stated non-interventionist foreign policy principles in 2016 – to oversee regime change in Venezuela.
Abrams has a notorious background as one of the main architects of regime change in Iraq. Before that, he helped fund and organize violent guerilla “freedom fighters” in El Salvador, Guatemala, and Nicaragua. He was even convicted of crimes over his role in covering up the illegal financing of Contra rebels in Nicaragua.
Genuine freedom advocates would love to see Venezuelans take back their country from the repressive socialist rule of Maduro. However, an artificially imposed regime change carried out by heavy handed U.S. interventionists could backfire.
Instead of Venezuela serving as a lesson in the failures of socialism, Marxists, and other anti-American ideologues in the region and around the world will blame U.S. sanctions and other imperialistic aggressions for destroying Venezuela.
U.S. adversaries China and Russia together stand to lose up to $120 billion if their contracts with Maduro’s government are voided. That’s certainly a big incentive for them to forge stronger counter-U.S. political alliances and counter-dollar economic arrangements with other countries that feel threatened by America’s deep state apparatus.
U.S. sanctions against Venezuelan gold are also raising grave concerns about trust and counterparty risk in the global financial system.
If the Bank of England can seize the gold of a sovereign government, is anyone’s gold held anywhere within the global banking system secure?
“In all its operations, the bank observes the highest standards of risk management and abides by all relevant legislation, including applicable financial sanctions,” the Bank of England stated. Essentially, then, its own custodial contracts mean nothing if “relevant” and “applicable” political pressure is brought to bear.
So what’s the lesson here?
One lesson is for countries that are not on the best of terms with the U.S.
Such nations are earnestly developing ways to move assets out of the Federal Reserve Note dollar system and beyond the reach of U.S. financial authorities.
Another lesson relates to how to store gold or silver.
If you don’t want to take personal possession of your precious metals, avoid vaults that are managed by regulated banks. There is absolutely no reason to take on this additional counterparty risk when more private storage options are widely available.