Hugo Chavez’ Gold Gambit

On August 18, 2011 Venezuelan President Hugo Chavez demanded the return of his country’s gold reverses held in foreign banks. The Venezuela president referred to the “criminal bankers in New York and London” as the prime custodians of the gold. Estimates put the Venezuela reserves at @ 200 tons of gold. In order to conceptualize how much gold this is, you need to imagine 170 armored trucks in a line. To receive its gold Venezuela must make all the necessary arrangements to receive the shipment, including adequate insurance and secure transportation. The movement of so much gold is a logistic nightmare. This being said; I believe Venezuela can make the necessary arrangements.  Request for Gold

It is likely that the U.K. and U.S. banks might not be able to immediately comply with Chavez’ request. The banks might not physically have all the gold. Also there might be legal restrictions that prevent the banks from returning all the gold. Banks regularly enter into contracts where gold reserves are leased to other banks.  The banks trade and negotiated these contracts without any movement of gold. The banks cannot violate the terms of the contracts. Some of Venezuela’s gold is covered by these contracts. Consequently the custodian banks might have to buy “Venezuelan’s gold” on the open market. Because  gold is being traded at record highs the banks would suffer loses buying gold on the open market. Likewise the banks would suffer loses if it had to delivery the physical gold that is worth more than the traded contracts. Hugo Chavez has the right to request the return of his country’s gold. I believe that the custodian banks’ compliance with the request would be everyone’s interest.

The experts differ about why Hugo Chavez is requesting the return of Venezuela’s gold. Most suggest that he does not want his country’s assets frozen by the imposition of international sanctions. President Chavez’ comrade in arms, Muammar Gaddafi, lost control of his regime due partly to the imposition of sanctions. This explanation is plausible and logical but it cannot be the President Chavez’s principal consideration. We may not approve of Hugo Chavez, the man, his policies or rhetoric, but he is no Muammar Gaddafi or Robert Mugabe. The imposition of international sanctions against Venezuela is an unlikely possibility.

After requesting the return of Venezuelan gold President Chavez, just days later, signed a decree nationalizing his country’s mining industry. It is not clear what exactly was nationalized. Rusoro Mining Ltd., a Vancouver-based company, is the only non-Venezuelan firm actually mining gold in the country. Understandably Rusoro is keeping a low profile as not to antagonize Venezuelan authorities. However; two other Canadian companies who  had their mining interests nationalized are seeking compensation for their loses. Gold Reserve Inc. and Cystallex International Inc. demanded that Venezuela arbitrate their expropriation claims. Canadian Companies Pursuant to the Canada-Venezuela Investment Protection Treaty of 1996Venezuela could suffer an adverse arbitration award in the billions of  dollars. Gold Reserve Other companies are also suing Venezuela as a result of their interests having been expropriated. What legal reason does Venezuela have for  not compensating these companies for their interests which were expropriated? Based upon my research the Canadians companies will prevail after an arduous arbitration  process.

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About Paul Hunter Jones

I was raised in Great Neck, New York. In 1975 I received a B.A. degree from Alfred University. Three years later I graduated from the University of Michigan School of Law and have been practicing law in New York ever since. I am a Republican though I will vote according to the better policy or stance. Politics, law, and finance are my interests. I give special thanks to Cheryl Jones of Lexington South Carolina, my sister, and Eliana Trout Blanco of Santa Marta, Colombia, a one of the kind friend, for their contributions in the writing of this blog.

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