Venezuela Got Slammed By The Crash In Gold Prices
According to BofA Merrill Lynch economist Francisco Rodriguez, Venezuela's central bank holds 72% of its reserves in the form of monetary gold – an asset that has lost 27.2% of its value already in 2013.
"Venezuela’s international reserves have fallen 23% [year-to-date] to their lowest level since 2004," writes Rodriguez in a note to clients. "A close look at the data reveals that almost the totality of the decline in reserves can be explained by gold prices falling from their peak in [the third quarter of 2012]."
Rodriguez writes:
Reverse Midas
Seventy-two percent of Venezuela’s central bank reserves are held in the form of monetary gold. The central bank values these holdings at the six-month moving average of the London fixing price for gold. An effect of the moving average valuation is that the full effect of price movements is incorporated into the data with a lag. This explains, for example, why gold reserves fell 7.4% since the end of June even as gold prices were recovering (Chart 4).
Valued at market prices, gold reserves have fallen $4.2bn ytd and $5.5bn from their September 2012 peak. Not all of this decline has been incorporated into the reserves figure reported by the central bank due to the smoothing effect of the moving average formula. If gold remains at its current price, we can expect reserves to decline by an additional $1.1bn due to this effect.
Non-gold reserves now stand at $6.4bn. Of this, $3.9bn are SDRs and net credit positions before the IMF, leaving $2.6bn of FX holdings, 70% of which is in liquid instruments. The $2.6bn of reserves ex-gold and IMF may appear low compared to December ($6.0bn) or June ($4.2bn), but that largely reflects seasonal factors associated to PDVSA transfers to the central bank at the end of every semester. The current level is only moderately lower than the $3.2bn August 2012 level.
"Our baseline scenario actually contains a slight improvement in the total value of cash holdings, as our commodities team expects the price of gold to recover and reach $1495/oz by year-end," says Rodriguez. "We expect the total value of public sector FX holdings to stabilize through year-end at $54.4bn, a similar level to that of 2012 ($54.0bn), even as total reserves end the year at around $23.2bn, $6.6bn lower than at the end of 2012."
BCV, BofA Merrill Lynch Global Research