How to get $12 billion of gold to Venezuela

By Felix Salmon
August 23, 2011
broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I've been wondering how on earth he possibly intends to do such a thing.

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Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing.

There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it’s all in one place, um, well, nobody has a clue what might happen. Here’s the best guess from the FT:

Venezuela would need to transport the gold in several trips, traders said, since the high value of gold means it would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas, traders estimated.

“It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses.

It’s not much of a precedent, but it’s the only precedent we’ve got; my gut feeling is that Venezuela would be do well to get away with paying 3.3% of the total value of the gold in total expenses. Given that the gold is worth some $12.3 billion, the cost of Chávez’s gesture politics might reasonably be put at $400 million or so.

It seems to me that Chávez has four main choices here. He can go the FT’s route, and just fly the gold to Caracas while insuring each shipment for its market value. He can go the Spanish route, and try to transport the gold himself, perhaps making use of the Venezuelan navy. He could attempt the mother of all repo transactions. Or he could get clever.

In the first instance, the main cost would be paid by Venezuela to a big insurance company. I have no idea how many insurers there are in the world who would be willing to take on this job, but it can’t be very many, and it might well be zero. If Venezuela wanted just one five-ton shipment flown to Caracas in conditions of great secrecy, that would be one thing. But Chávez’s intentions have been well telegraphed at this point, making secrecy all but impossible. And even if the insurer got the first shipment through intact, there would be another, and another, and another — each one surely the target of criminally-inclined elements both inside and outside the Venezuelan government. Gold is the perfect heist: anonymous, untraceable, hugely valuable. Successfully intercepting just one of the shipments would yield a haul of more than $300 million, making it one of the greatest robberies of all time. And you’d have 39 chances to repeat the feat.

Would any insurer voluntarily hang a “come get me” sign around its neck like that? They’d have to be very well paid to do so. So maybe Chávez intends to take matters into his own hands, and just sail the booty back to Venezuela on one of his own naval ships. Again, the theft risk is obvious — seamen can be greedy too — and this time there would be no insurance. Chávez is pretty crazy, but I don’t think he’d risk $12 billion that way.

Which leaves one final alternative. Gold is fungible, and people are actually willing to pay a premium to buy gold which is sitting in the Bank of England’s ultra-secure vaults. So why bother transporting that gold at all? Venezuela could enter into an intercontinental repo transaction, where it sells its gold in the Bank of England to some counterparty, and then promises to buy it all back at a modest discount, on condition that it’s physically delivered to the Venezuelan central bank in Caracas. It would then be up to the counterparty to work out how to get 211 tons of gold to Caracas by a certain date. That gold could be sourced anywhere in the world, and transported in any conceivable manner — being much less predictable and transparent, those shipments would also be much harder to hijack.

How much of a discount would a counterparty require to enter into this kind of transaction? Much more than 3.3%, is my guess. And again, it’s not entirely clear who would even be willing to entertain the idea. Glencore, perhaps?

But here’s one last idea: why doesn’t Chávez crowdsource the problem? He could simply open a gold window at the Banco Central de Venezuela, where anybody at all could deliver standard gold bars. In return, the central bank would transfer to that person an equal number of gold bars in the custody of the Bank of England, plus a modest bounty of say 2% — that’s over $15,000 per 400-ounce bar, at current rates.

It would take a little while, but eventually the gold would start trickling in: if you’re willing to pay a constant premium of 2% over the market price for a good, you can be sure that the good in question will ultimately find its way to your door. And the 2% cost of acquiring all that gold would surely be much lower than the cost of insuring and shipping it from England. It would be an elegant market-based solution to an artificial and ideologically-driven problem; I daresay Chávez might even chuckle at the irony of it. He’d just need to watch out for a rise in Andean banditry, as thieves tried to steal the bars on their disparate journeys into Venezuela.

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Comments
51 comments so far

I think it should be “nationalized”, in keeping with Venezuelan business practice.

Posted by SCHARFY | Report as abusive

Didn’t De Gaulle transport 130 tons of gold from the US to France in 1965? Not 211 tons to be sure, but substantial nonetheless

Posted by eddiejessup | Report as abusive

We sure it’s Venezuelan gold and not Libyan ?

Posted by kmitchelson | Report as abusive

Re: “criminally-inclined elements both inside and outside the Venezuelan government…” but of course. The David Mamet movie script almost writes itself with this scenario.

Posted by Strych09 | Report as abusive

To further your repo transaction idea. Why not buy gold from those within South America and sell it’s store of English held gold in equal amounts or even just trade with local gold for English held gold. I’m sure there must be at least some institutional gold holders in South America who wold love to trade their own unsecured gold for super secure gold held in England

Posted by Josephmyke | Report as abusive

“But here’s one last idea: why doesn’t Chávez crowdsource the problem?”
Sounds utterly insane to me: put gold in the hands of desperate who (a)might just leg it, (b)will set up a constant and dependable stream of vulnerable robbery targets and fraud opportunities.

It would give birth to a criminal society that would probably rival some drug cartels.

Posted by Raaagh | Report as abusive

Nobody is going to screw with a well armed naval escort carrying this gold. Problem solved.

What’s strange is that the author seems perplexed as to why anyone would want to HAVE their own gold… The answer is simply to eliminate counter party risk. Do the people who say they have the gold actually have it? When the SHTF will they have it? Or will they have paper instead?

The real question is how hard it’s going to be for the paper pushers to find actual physical gold to give up.

Posted by svenp | Report as abusive

Venezuela’s gold could be counterfeitted: that’s why Chavez must stress that he want HIS OWN gold bars back, not just the same amount of gold. The dollar is quickly losing its value due to detachment from gold itself and the approaching western economic crisis… will the gold standard be resumed? I hope so. It would make it much harder for governments and multinationals to cheat and loot.

Posted by sbugiardo | Report as abusive

Why doesn’t David Cameron get straight on the line to Hugo and offer him a few options? The most obvious one to me would be to offer a UK military force to help transport the gold, a couple of battleships maybe, for a small fee to cover costs and make us a bit of money, maybe 5%. We’re not exactly flushed with cash at the moment, maybe it would help build relations and get us a discount on all that oil he’s sitting on

Posted by Mateop | Report as abusive

Another precedent:

India in 1991 faced a balance of payment crisis withless than a billion dollar of foreign exchange at hand (roughly equal to a few days of imports). On July 1st of that year, in an unannounced move, the Reserve Bank of India transported 67 tons of its gold reserves to Bank of England and the Union Bank of Switzerland securing a 400 million dollar line of credit.

Incidentally, this event marks the turning point in India’s handling of the economy and sparked the economic liberalization we have seen over the past two decades

Posted by Simon.Hapworth | Report as abusive

I really don’t see why the Venezuelan navy transporting it as cargo in a fleet of warships would be such a problem (with the help of any other friendly navy, if it comes to that). Throw enough weaponry to defend something effectively, and defend it with the military, and it’s very likely to succeed. Let’s remember, the military is specifically designed to effectively persuade people to do the kind of things that they may be logically reluctant to do, such as risking their life for people they never met. Persuading them not to steal something that may be tempting is far easier.

Besides, it’s how governments have transported gold in the past, and it’s worked fairly well. Why come up with a newfangled method when the old one seems to work?

Posted by Doly | Report as abusive

To address the issue of using the navy: I believe that the author is subtly asking how loyal a branch of the armed forces of an effective dictatorship would be when it found itself in possession of $12.3 billion of gold?

Someone might decide that that amount of money might enable them to run the country more effectively.

Posted by FlammableFlower | Report as abusive

Let’s see if the banks in London can actually produce a few hundred tons of unenencumbered, unleased-out gold. That is a drama nobody has realized may happen, yet.

Posted by Abe.Froman | Report as abusive

I’m very curious on the last point actually, yes, How is BoE going to produce that much gold anyway? Anyone knows?

Posted by treespotter | Report as abusive

“Which leaves one final alternative”…

Why should the people sell it back to Venezuela? To receive a bunch of paper money soon to be much less worth due to inflation and economic instability?

I think Chavez would not risk to sit on a mountain of dollars which value shrinks every day.

This appears to be a long term backup under control of the owner which could be changed into any world currency if necessity arrives.

Posted by Laeuro | Report as abusive

1. Chávez doesn’t have to actually pick it up, just announce that he will pick it up and send a supertanker. The London bank may not have the gold. Remember that episode of _Beverly Hillbillies_ when Jed wanted to see his money?
2. Even if the Venezuelan Navy is loyal and excellent fighters theft isn’t the only problem. Chávez’ enemies can simply torpedo and sink the gold thus destroying the Venezuelan economy.
3. Trusting ‘standard gold’ bars got Ethiopia into trouble, no? [ http://news.bbc.co.uk/2/hi/africa/729466 5.stm ; http://www.popsci.com/diy/article/2008-0 3/how-make-convincing-fake-gold-bars ]

Posted by esnible | Report as abusive

This whole thing reminds me of Neal Stephenson’s “Cryptonomicon” where there is an extended discussion of how to get $120 million out of the Philippine jungle:

http://www.euskalnet.net/larraorma/crypt o/slide61.html

Start at the passage “Let me transition to a Q&A format here.”

Posted by adampasick76 | Report as abusive

Felix,

RE: ” I have no idea how many insurers there are in the world who would be willing to take on this job, but it can’t be very many, and it might well be zero.”

It is (effecitvely) zero. All of the big carriers paid out large claims under their political risk insurance policies after his multiple expropriations and defaults on trade debt of government owned entities. No carrier will touch VZ risk.

Posted by khumphrey86 | Report as abusive

The Chinese intend to put it on the new air craft carrier and sail back to Venezuela in triumph with full military escort.

Posted by whiteyward | Report as abusive

The book ‘Operation Fish’ details WWII-era gold shipments from Britain and France to Canada.

Like eddiejessup above, I also thought I’d read somewhere that DeGaulle sent a warship to NY in the 1960s to pickup France’s gold.

Posted by Polycapitalist | Report as abusive

The major risk here is not the transport.

The major issue seems to be counter-party risk.

Does the Bank of England have the gold.

Everything else is noise.

Posted by JessesCafe | Report as abusive

All,

Diamonds are worth more than gold per gram and are moved in large quantities all the time. Computer chips are worth roughly as much as gold (depends on the chip) per gram and are shipped around the world.

This just isn’t that hard. The 767-300 Freighter can carry up to 60 tons (54.4 metric tons) of cargo. 4 flights would suffice at a cost of less than $1 million per flight.

Of course, a greater division might be required for insurance purposes. Say 21 flights of 10 tons each. That’s still less than $21 million.

A quick check online shows that a 767 leases for around $20,000 per hour of flying time. The flight from London to Caracas is 14 hours. The total lease cost should be roughly $560,000 per flight.

I have no idea what the insurance might run. However, only 1 commercial flight in 2 million crashes. Other sources put the probability of a crash even lower.

As for theft, guards can be provided with “guns”. Try stealing something from a person with an M4. Good luck with that.

Posted by fyouell | Report as abusive

Traditionally this quantity of gold is moved by warship. Venezuela has half a dozen frigates any of which should be able to do the job easily.

Posted by mllaneza | Report as abusive

C’mon, let’s keep this traditional – I suggest Galleons! Perhaps with a few Ships Of The Line for escorts?

Posted by Wraithe | Report as abusive

“Traditionally this quantity of gold is moved by warship. Venezuela has half a dozen frigates any of which should be able to do the job easily.”

Sounds right to me. How much does a transatlantic voyage cost for a frigate? Above and beyond current operating costs?

Probably in the low millions.

Posted by fyouell | Report as abusive

It’s a funny story but I suspect (as others) that the logistics are less of an issue that we might imagine. 200T of something you simply cannot afford to have stolen get transported around all the time: forget money and consider WMDs. This isn’t a dumb action movie. Organized crime does not mess with national security.

Posted by podperson | Report as abusive

What’s $12 billion in printer ink? You could probably bring that over in 1 flight.

Posted by etd1 | Report as abusive

The main work we have to do about this is to demolish the foolish idea of gold as an “objective” basis for money. This leads to comedies like this. Chavez wants gold, in a secure place, for prestige. But wait — we still have that Ft. Knox place, right? You give military security for the magic substance that IS our wealth. Take the gold and you sap our national identity or something. You take the magic gold from the street peddler.

During times of financial collapse, the gold play is 100% psychological. In other words, sympathetic magic.

Posted by Swift2010 | Report as abusive

Has it occurred to anyone that maybe, just maybe, the Soviets didn’t give the Spanish the best deal? Any Orwell readers around here?

Posted by fyouell | Report as abusive

I like @Strych09′s idea of a Mamet movie, but I think it’s more likely a new Steven Segal vehicle:

A Venezuelan warship carrying the gold is torpedoed and sunk in the Caribbean. Chavez tells the world about evidence that points to a US submarine. Meanwhile, a small group of special forces loyal to Chavez have actually carried out the attack, after pulling the old switcharoo. The gold is actually on a cruise ship, and Chavez plans to keep it for himself.

Little do the bad guys know that the ship’s chef is a retired Navy Seal. With a little help along the way from a plucky young female junior ship’s engineer (who, with her hair down and the grease cleaned off her face, will turn out to have supermodel good looks), the Seal will defeat the bad guys, prove America’s innocence, and return the gold to the people of Venezuela, after they overthrow Chavez.

“Under Siege 3: Caribbean Gold”. Direct to DVD, spring 2012 release. Rated R for violence, strong language, and sexual content (because at some point the supermodel-engineer will naturally have to do some pole dancing to distract the corrupt Venezuelan commandos…)

Posted by tsarna | Report as abusive

Also, at some point, the Seal will need a gun, so the engineer-supermodel will seduce one of the commandos in the galley, telling him “let’s have a party right here on the counter, baby!”.

Then the Seal will sneak up, take him out with some aikido move, and say, “now THAT’S a counter party risk!”

Posted by tsarna | Report as abusive

First big mistake was that Hugo Chávez shot his mouth off. Why would anyone with two brain cells even mention it.

Posted by Alexander_Sr | Report as abusive

The idea of another Steven Segal movie sounds more plausible than the actual financial transaction.

Posted by ScottNV | Report as abusive

For the many who asked, the reason they can’t put $12 billion worth of gold on a naval escort is that there’s a real risk the naval escort could then sail off to some other country with $12B worth of gold.

Chavez was already deposed by the military once, he is not loved outside the small coterie of his own high level appointments.

Posted by TallDave | Report as abusive

Chavez is doing the smart thing. He shouldn’t trust any government or bank to handle the gold that will sustain his country through the intentional global economic crash.

UN Agenda 21 mandates the crash, to usher in global communitarianism. The cherry on the cake is that the Fabian socialist media work so hard to convince the public that anyone who does not abide by their agenda is a “nutcase.”

Journalism is objective and does not resort to opinion. Anything less is propagada — a tip off to the massses that they are reading propaganda with an agenda behind it.

Posted by Tulpa | Report as abusive

“I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases….”

Hmmm, gold has been going up at 18% a yr for 10 years straight now – certainly have to be a nutcase to invest in that!!

Personally, it’s made me crazy rich LOL

Posted by dlweld | Report as abusive

Interesting that the $/kg of gold seems to cause such problems. If it was lower (eg, wheat), then you don’t have such a target for robbery. If it was higher (eg, diamonds), then you can do the transfer in fewer shipments, reducing your transfer costs. Must be a nasty place on the curve.

Still not sure you can just summon 200 tons of gold to appear in Caracas by “crowdsourcing”. And the negative externalities could be quite horrific.

Posted by SteveBennett | Report as abusive

What kind of pirates are you talking about?! Are there pirates in the Atlantic that can attack a soverign navy and win!? You’ve been watching to many James Bond movies. Why would Hugo Chavez go for the repo?! That’s almost as useless as having the gold held abroad. If he’s afraid that the global financial system will collapse or gold will sky rocket and the US and West just reneg on the hold leasings they have, the only way to go is to take hold of the physical Gold. No way around it. I’d send in the Venezuelan navy. They probably don’t have anything better to do anyways.

Posted by alexdg | Report as abusive

Chavez can’t steal the gold if its in England in an account owned by the Venezuelan government. On the other hand, he /can/ steal it, if he is put in charge of it.

Posted by DocMerlin | Report as abusive

exactly, Doc. If the gold goes missing in transport, everyone knows. If it goes missing from the central bank in Venezuela, nobody knows…

Posted by Tadhog | Report as abusive

One of the best articles on Reuters in weeks! Educational and very savvy. This author can grow on me…

Posted by Independent007 | Report as abusive

We’re getting into economic loony tunes here.

Scenario 1: gold continues to inflate. Argues the rest of the economy crashes. But if the world economy crashes, can he offload 211 tonnes of gold? Can he even deliver it? You need to double that freight cost, unless he wants to rival King Tut in his funeral bling.
Scenario 2: the world economy stabilises. Bank of England buys it back at half the price, compounding Gordon’s embarrassment.
Scenario 3: we continue to drift mindlessly downwards. Even then, a long gold position at these levels seems adventurous.
The risk with bubbles is they pop. Whether gold is a bubble or not time will tell.

Posted by Rahere | Report as abusive

Yes, wasn’t it someone in England that sold half of England’s gold reserves for next to nothing? While it was at 300 or so?

Anyway, the problem that people are forgetting about is the fact that any shipment of gold would HAVE to be insured. So all scenarios talking about a submarine attack, etc, are moot.

I like the 767 or even 747/400 idea the best. It may take more trips, but it would be worth it and you would speed up the time frame for delivery and probably make more insurers rest at ease(the sinking boat torpedo theory actually sent chills up my spine, its possible). OR they just DELIVER gold FOB Caracas, and are only responsible for the gold once its tendered on Caracas soil. Just saying…

Posted by Independent007 | Report as abusive

By the way Felix, hats off again to an excellent article. If more at Reuters would simply inform us as to how the game is played at the HIGHEST LEVEL without the BS or sugarcoating or dumbing down of the article, you would have much more positive reviews and fewer negative ones. Us readers are not in junior high. Again great article. This was stuff I was wondering about for days, yet no one bothered to look it up and present it to the readers, except you of course. OK guys, I officially have stopped patronizing Felix. Now back to business…

Posted by Independent007 | Report as abusive

This article lowers the average quality level of Reuters content considerably. One would expect this kind of article from a spokesperson for the US or UK governments not a Reuters blogger.

Aside from heavily pumping the western propaganda line re Venezuela i.e
- inserting quotes that suggest the Venezuelan Central bank does not know what its doing.
- calling Chavez crazy
- imputing the existence of dangerous criminal elements in the Venezuelan government.
- suggesting the Venezuelan navy can not be trusted to transport the gold
- calling this “gesture politics”
- reducing the whole issue to something Chavez is doing instead of an action of the Venezuelan government.
-All this intended to denigrate Chavez and the Venezuelans. To make them look foolish, clueless etc.

Aside from all this service to the party line, the author proposes a solution which makes no sense. If Venezuela can’t find an insurer for the gold transports how would the counter party on the repo do so? After all they would also need to do multiple shipments and those criminal elements in the Venezuelan govt would need to know when the gold is coming in anyway. They would face the same risks without the benefit of a navy of their own. Poor solution.

Obviously Venezuela can just put this on a navy ship with an escort and sail direct to Venezuela. After all if they can’t secure their gold on a navy ship, how can they secure it in Venezuela?

How does the bank of England secure the gold anyway? Or do they not have any criminal elements in that government?

And then there is the “gesture politics” cheapshot. How is Venezuela taking their gold out of the vaults of a hostile country and storing it themselves “gesture politics”?

There are umpteen examples of western countries freezing the assets of countries whose policies they don’t like. And handing them over to rebels! Venezuela is a prime candidate for that.

I’d say its a pretty wise move!

emk

Posted by emk | Report as abusive

Related: “Presidente Francisco Franco is still dead”

Posted by ChuckV | Report as abusive

A handful of a few malnurished Somalia teenager pirates will have any ship delivered to Mogadishu.

Posted by Junkman | Report as abusive

My grandfather served on the heavy cruiser USS Vincennes before and during WWII. One of their missions (right before the US entered the war) was to help rescue 200 tons of Bank of France gold from the Nazis – see http://books.google.com/books?id=1EV4r9P lB8IC&pg=PA24&lpg=PA24&dq=vincennes+fren ch+gold+cruisers&source=bl&ots=OroY4_Evs r&sig=cvYFW3pxtl8n25sUI6Sg1HGU6qY&hl=en& ei=5EVgTofrG-vViAL6nb2mDg&sa=X&oi=book_r esult&ct=result&resnum=7&sqi=2&ved=0CEwQ 6AEwBg#v=onepage&q=vincennes%20french%20 gold%20cruisers&f=false

Posted by JamesMMoore | Report as abusive

Check out this _almost completely unrelated_ but still very cool video of a couple guys pushing around a 200 ton ship: http://www.youtube.com/watch?v=Lwsxe_rUf sw . 200 tons, whatever, dude :-).

Posted by JamesMMoore | Report as abusive

Hey, emk: Lighten up, dude. Maybe the stiffs at the Financial Times treat Chavez like a Diplomat- he’s just a tinpot dictator to the rest of the world.
Let’s all not lose sight of the fact that 211 tons of cargo is a drop in the bucket as far as weight goes- that’s six containers, give or take. Transport isn’t a problem. the problem is giving a crackpot like Chavez access to that much ready cash.
I can just see it now: A hangar with a different colored Gulfstream for every day of the week, a set of Givenchy silk pajamas with little Che Guevara heads all over them, and the mini giraffe from his Russian friend. He’d be so busy spending all that gold he wouldn’t have time to jack with the South American economy- sounds like a win to me!

Posted by cphilips123 | Report as abusive

What is the big deal anyway ? India imports nearly 800-1000 tons of physical gold every year and China is close to that number. All this gold is used for jewelry and hence actually travels every year. Obviously, commercial modes are well established to transport physical gold in hundreds or even thousands of tons a year.

Posted by rsksquare | Report as abusive
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