You might remember the flurry of gold repatriation stories that emerged a few years ago. It began when Germany wanted to repatriate some of its gold from the New York Federal Reserve, the Bank of England, and the Bank of France. Germany has, according to some estimates, the second largest holdings of gold reserves after the U.S.A. The story then became...well, peculiar, when we learned that there would be some "delay". For my part, I speculated that perhaps, once again, the NY Fed has somehow "misplaced" Germany's gold, the first time being during 1928 during a visit of Reichsbank president Hjalmar Schacht. Even after Germany supposedly had the gold returned, there were stories about the purity of that gold, and lack of transparent assay and audit.
During this period, other countries suddenly jumped on the gold repatriation bandwagon, including Austria, the Netherlands, and... Venezuela.
Well, Venezuela's efforts are again in the news, according to this article shared by V.T., and it's a story that might contain some clues:
Note that Venezuela's request for its gold has yet to be honoured, but for a very intriguing reason:
In what’s becoming one of the longest running legal dramas in the global gold market, the saga of Venezuela’s ‘frozen’ gold in London continues to roll on, most recently reaching the UK Supreme Court in a 4 day court hearing between 19 – 22 July.
At the core of the legal drama is the question of who has the authority to withdraw Venezuela’s gold reserves which are stored in custody at the Bank of England. Is it the Banco Central de Venezuela (BCV) under the direction of de facto president of Venezuela, Nicolás Maduro, or is it a team directed by self-styled interim president of Venezuela Juan Guaidó, who is backed by the US and UK governments. Given the multiple developments in this saga over the last few years and the complexity of the matter, a recap is in order. (Boldface emphasis added)
To understand the significance of this development, imagine, for a moment, that all of the USA's gold, or significant amounts of it, were held by the Bank of France, and then imagine if the Bai Den regime demanded that x amount be repatriated, and the Bank of France refusing on the basis of concerns about voting fraud and election legitimacy. In effect, that's what is going on here.
But this is where it gets interesting, because in the absence of a clear legal claim, that gold enters a kind of bullion limbo, where notwithstanding the legal issues, its claimants can still use it in transactions, in this case, as collateral:
From 1980 until 2011, the BCV had 99.2 tonnes of gold stored at the Bank of England. For details, see the BullionStar article from May 2015 titled “Venezuela’s Gold Reserves – Part 1: El Oro, El BCV, y Los Bancos de Lingotes”.
Between late 2011 and early 2012, the BCV conducted a famous gold repatriation operation, flying 160 tonnes of gold bars that were held abroad, back to Caracas in Venezuela to be stored in the vaults of Venezuela’s central bank. Following the completion of that gold repatriation in January 2012, this still left 4,089 of BCV’s Good Delivery gold bars stored in the Bank of England’s vaults (about 50.8 tonnes).
Sometime after 2012 and until 2018, the BCV then began entering various gold swap transactions, including those with Deutsche Bank and Citibank as counterparts, and also with the Bank for International Settlements (BIS) as a counterpart. To do this, the BCV used most of the gold that it held in the Bank of England vaults in London as collateral for the gold swaps.
One such transaction was a $1.7 billion gold swap with Deutsche Bank, which the BCV let lapse in 2017, thus allowing Deutsche Bank to keep the gold that had been put up as collateral. This was somewhere between 30-40 tonnes of gold.
Another was a gold swap transaction with Citibank, again with the BCV putting up gold as collateral. In April 2018, the BCV paid Citibank $172 million to recover some of that gold from Citi which had been put up as collateral. That then left the BCV, as of April 2018, with a net total of 14 tonnes of gold held at the Bank of England (about 1125 Good Delivery gold bars).
Note that physical delivery gold is being used as collateral in swaps with other banks, long before the legal issues currently before British courts are resolved, and recall that the Bank of England almost immediately began stalling on the repatriation of Venezuela's gold when that government first demanded it, even under then-president Hugo Chavez. The question is, did real physical gold leave the Bank of England's vaults, and if so, why, and where is it now? Or were these paper transactions only, leaving the physical gold still at the Bank of England, with the books reflecting that Venezuela only has fourteen tons of gold currently on its account.
Or to put my speculation country simple: it appears that "someone" is seizing the opportunity to use Venezuela's gold over and over (rehypothecation) under cover of the question of its legal owner to build more liquidity into the system, and notably, squatting in the middle of it, are the Bank of International Settlements, and our old (and dubious) friend Deutsche Bank.
And this, as the article says, is where it gets interesting:
n November 2018, it became public knowledge that the Bank of England was stalling on the BCV’s request to withdraw 14 tonnes of Venezuela’s gold from London, with the Bank of England using bogus excuses such as transportation insurance costs and anti-money laundering concerns to not fulfill its withdrawal obligation on BCV’s gold custody contract.
However, the real reason for stalling the BCV’s gold withdrawal request was political – in the form of US State Department and US Treasury pressure that was put on the British Foreign office and HM Treasury to block Venezeula’s gold withdrawal and repatriation plan. This stalling was designed to allow time to roll out US sanctions against Venezuela in November 2018 and critically, to move the goalposts and change the rules of the game by allowing time for the Guaidó team (backed by the US and UK) to enter the arena so as to try to win control of the remaining 14 tonnes of BCV gold at the Bank of England.
All of this raises a rather nasty question: was the US-UK decision to back the claims of Juan Guaido to be the legitimate government of Venezuela really not about the alleged "socialism" of Maduro's government, but rather really about the control of the gold? And if so, why bother with such a comparatively small amount? One possibility might be that Venezuela's handling of its bullion, suggestive as it is of massive rehypothecation, might expose the widespread use of that tactic. In effect: want to rehypothecate a lot of gold? Then obfuscate the issue of its ownership.
The article concludes with some stern warnings and implications:
While the Supreme Court judgment will determine who has the authority to withdraw and use 31 tonnes of BCV gold stored under custody at the Bank of England, this case will also have far reaching international implications for all sovereign assets held in the United Kingdom, and particularly monetary gold.
A ruling in favour of Guaidó will mean that the UK Government can at will seize control over state assets of foreign governments held at the Bank of England and elsewhere, and such a ruling would send shockwaves internationally about the notion of sovereign property rights, and how they are treated in the City of London, and wider England and the UK.
A ruling in favour of Guaidó also creates a worrying situation where a government executive (HM Government) can intervene and interfere into the judiciary using claims which have no basis in reality – i.e. Guaidó has no control over the Venezuelan central bank, nor it’s employees, nor is he even recognised by the EU as president of Venezuela, nor is he recognised as president by a vast list of countries including China and Russia, nor is he even leader of the Venezuelan national assembly anymore.
Over 70 sovereign nations hold gold in storage at the Bank of England including many nations in South and Central America and across the Middle East and Asia. If the Supreme Court rules against the BCV and in favour of Guaidó, and creates this precedent that sovereign gold reserves are not safe in London, expect the sound of many phones ringing at the Bank of England from central banks around the world trying to line up their gold withdrawal and repatriation requests. That in itself would be a sight to behold.
While you might think that the five lords a-leaping in the Supreme Court in their judgement will take these critical sovereign property right concerns into account, don’t underestimate the connections between the various strands of the British Establishment across politics, judiciary and the City of London, where the ‘fraternities’ and undisclosed connections between the ‘brothers’ will nearly always be more important than what how an outsider would view the situation.
It would therefore not be surprising if the law lords of the Supreme Court side with the Foreign Office, the Bank of England, and the US State Department, who are all working on the same side to prevent the BCV getting its hands on 31 tonnes of the BCV’s gold bars (worth approximately US $ 1.8 billion at current spot price).
Moral of the story for central banks – Don’t hold gold at the Bank of England if you actually ever want to withdraw it.
But if my own speculative analysis is correct, this story is about much more than a squabble between two central banks. It's really about the practices of an entire financial system, a system that's in huge trouble, and which - to my eyes - appears to be scrambling to maintain its physical control of as much actual physical bullion as possible. Maybe that's why the whole gold repatriation fad got started with Germany... maybe they suspected "something going on."
See you on the flip side...