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Will We See More Governments Purchasing Gold?

This week, the Venezuelan government reached a deal with the U.N. Development Programme (UNDP) to use part of its gold reserves at the Bank of England towards the purchase of food and medicine during the coronavirus pandemic. 

The move came after Venezuela’s central bank governor, Ortega, made a legal claim to 31 tonnes of gold, arguing that the gold belonged to the Venezuelan government. The Bank of England initially pushed back on Ortega’s request because Britain does not recognize Maduro as the legitimate ruler of the country, due to his rise to power from a rigged 2018 re-election.

To prevent potential corruption, the Bank of England will transfer the gold to the UNDP directly, a move that certainly perturbed Maduro’s government. Ortega summed up the reason for the deal succinctly, referencing Venezuela’s six-year economic collapse:

“This is the worst a nation can experience. We have no income, no way of generating cash flow, and no access to funds we have deposited abroad in the middle of a pandemic.” 

Interestingly, the move to employ some of the government’s gold reserves was preceded by a denied request for $5 billion from the International Monetary Fund (IMF). The IMF declined the request due to continued debate about the legitimacy of Maduro’s re-election.

Is this a trend that will become more prevalent?

Venezuela is not the first country or business to turn to gold as a means of accomplishing a transaction. Taxpayers in the EU or the US may use gold as a way to avoid reporting of capital gains liability. Countries prohibited from the US dollar market or the euro market may turn to precious metals to accomplish their trades.

A more interesting question is whether the Venezuela example is something that the world will see more of in the coming years? The answer is probably yes.

The following graphic has gold holdings by country from 2000 to 2019. Most countries have stayed relatively stable in their gold holdings, with some major exceptions. Two of the most eye-opening exceptions are China and Russia. Over the past few years, these governments have been accumulating gold at an astonishing rate. Does this mean they plan to use gold as a way to circumvent US dollar or euro hegemony? Perhaps. One thing seems clear – they have a clear strategy of accumulating gold reserves for an unannounced reason and making moves such as what Venezuela did could be the reason.   

Summing up

Overall, individuals, businesses, and governments have used gold as a transaction intermediary for many years. The recent rise in gold holdings of nations may make one wonder whether in the coming years there will be a resurgence in gold as a means to conduct business. It certainly is one way to avoid using the US dollar or the euro.