Central Bank of Venezuela uses new method to appraise gold reserves

Venezuelan international reserves are nothing but US dollars held by the country to finance imports, pay debts in US dollars, and back up the local currency. The country's reserves are mainly comprised by gold bullions (68%). Should gold price fall, the country's reserves will be negatively affected and negative signals will be sent to investors interested in buying Venezuelan bonds.   

After reaching a USD 1,900 cap in September, 2011, gold price went down, and it currently ranges from USD 1,500 to USD 1,620 amid low demand and global economic instability that have forced investors to invest most of their money in US currency and Treasury bonds.

In response, early in May, seeking to curb the impact of falling prices on the country's international reserves, the board of directors of the Central Bank of Venezuela (BCV) decided to change the method that had been used to appraise the value of Venezuelan gold bullion.

So, rather than appraising Venezuelan gold (11.76 million ounce) based on the average recorded by the London gold market in the common two-month term, Venezuela is using a six-month term basis.

Nevertheless, despite the efforts made by the BCV, gold price has continued falling, and by the first half of 2012 Venezuelan gold was worth USD 1,651.18 per Troy ounce versus USD 1,696.33 in the same term in 2011.

Such decline implies a 2.6% drop in Venezuelan gold reserves, standing at USD 19.4 billion. If gold price fails to rebound, growth in Venezuelan international reserves will depend on oil revenues only. 

In addition to highly vulnerable gold price, Venezuela faces another major concern: low liquid reserves, i.e. the amount of US dollars in cash necessary to pay imports. They hit USD 4 billion at the end of the first half.

As of the first half of 2012, US dollars for imports by the private sector grew 2.9% only.

Translated by Jhean Cabrera