Venezuelan President Hugo Chavez Sends Precious Metal ETFs A Wakeup Call (GLD, IAU, SLV, GDX, AGQ)

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August 17, 2011 8:37pm NYSE:AGQ NYSE:GDX

George Maniere:  OK. Let the fun begin! Today Venezuelan President Hugo Chavez announced that it planned to nationalize his countries gold mining industry in an attempt to increase its international reserves. This is not an unprecedented move. He has already nationalized the banking industry


, telecommunication companies, the oil fields, the producers of power for the country and millions of acres of farm land. President Chavez said that the nationalization of the gold industry was to protect the people of Venezuela from having their gold fall into the hands of the mafia and smugglers.

It was reported in The Wall Street Journal that Mr. Chavez said “we don’t only have oil wealth; we also have one of the largest reserves of gold in the world so we might as well convert it into our international reserves because gold is increasing in value.”

President Chavez also released documents showing that he plans to transfer billions of dollars in cash reserves held abroad to banks in China, Russia and Brazil. The documents also showed that he planned to move 211 tons of gold it has stored abroad and values at 11 billion to the Central bank in Caracas, where the government keeps its remaining 154 tons of bullion.

While Venezuela is a relatively minor player on the world stage, this could be a big game changer here in the United States because one of the banks that holds 10.6 tons of Venezuela’s gold is none other than JP Morgan. In a recent audit of JP Morgan’s holdings it was reported that they held 338,303 ounces of gold or roughly 10.6 tons. While this is a modest size deposit it is sure to cause some jitters at JP Morgan as they scramble to find the replacement gold which has already been pledged about 100 times across various paper markets to ETF’s like the SPDR Gold ETF (NYSE:GLD). Oddly I had a conversation with one of my readers yesterday about his concerns of holding ETF’s that “lease” the gold that he purports to own. I will certainly be keeping an eye on gold in the illiquid after market and pre market. The long overdue scramble for delivery may be about to begin. “What you do in the Dark, You See in the Light.”

According to Andre Agapov the CEO of Ruscoro Mining, which is based in Toronto he said he wasn’t worried about the announcement and he claimed to be a friend of President Chavez. He said he believed President Chavez’s words were directed at the many illegal mining operations which operate under the radar and use environmentally damaging practices like mercury dumping. Either way this is a wakeup call to ETF’s like GLD because President Chavez has proven that at times he is not completely forthcoming in all of his dealings.

The fact is that Venezuela’s gold mining industry does not play a major role in the country’s economy. While Venezuela is believed to have Latin America’s largest gold reserves, the country’s oil industry is the country’s major industry.

The reality is that the gold fields are located in remote jungle areas near the Brazilian boarder and have been dominated by small, illegal wildcat producers. It’s the Wild West. There are no police, roads or authority. The industry is largely dominated by smugglers.

There have been attempts to lure real gold producing companies but to no avail. While the government sings the song of clamping down on the smuggling of gold into neighboring countries, critics say that there has been little progress made.

The key to this essay is that whether President Chavez was posturing or is for real, it is time for ETF’s like GLD to get their house in order. Because if President Chavez does call JP Morgan’s bluff, ETF’s like GLD will come crumbling down like the house of cards it is built on.

Tomorrow should be a very interesting day as we see if this was more of President Chavez’s pointless posturing or if this time he is for real.

Related Tickers: SPDR Gold ETF (NYSE:GLD), iShares Silver Trust (NYSE:SLV), iShares Gold Trust (NYSE:IAU), ProShares Ultra Silver (NYSE:AGQ), Market Vectors Gold Miners ETF (NYSE:GDX).

EDITORS NOTE:
A representative of the SPDR Gold Shares , in response to the above George Maniere article, wishes to express the following: “The Venezuelan government doesn’t have any rights to the SPDR Gold Trust’s gold. 100% of the GLD’s holdings are allocated gold bars, which means that each individual gold bar is specific to that account and are the property of the Trust. The Trust has full ownership of the gold bars and the gold is not traded leased or loaned under any circumstance.”

GOLD CUSTODY FAQs From the spdrgoldshares website:
Following are responses to frequently asked questions concerning the custody of the gold transferred to the SPDR® Gold Trust, or the Trust. For further information about the custody of the Trust’s gold, including information about the duties and obligations of the custodian of the Trust’s gold and certain risks associated with the custody of the Trust’s gold, please refer to the Trust’s most recent Annual Report on Form 10-K and most recent Prospectus filed with the Securities and Exchange Commission. For your convenience, the Trust’s website (www.spdrgoldshares.com) provides links to the Trust’s most recent Annual Report and Prospectus.

 Written By George Maniere From Investing Advice

I have an MBA in Finance and 38+ years of market experience.  In 2009, I knew the market was seriously oversold and committed a serious amount of capital to the market. Needless to say things went quite nicely but I always remebered 2 important things. Hubris equals failure and the market can remain illogical longer than you can remain solvent. Please feel free to email me at maniereg@gmail.com.


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