What is Goldman Sachs doing with Venezuela's gold?

So is that a good deal for Venezuela? It depends how you count but it's hard to imagine the answer is yes. I mean: Why would Goldman do it if the answer was yes? There are some other arguments below but that is surely the main one.7

Because, if true, this is not the most pristine deal you ever will see! (Goldman declined to comment.) I mean, one, Venezuela -- it inspires people to feel feelings, plus you might have some weird dynamics around actually getting them to post margin.8 Two, complex derivatives etc. -- more feelings, though despite the word "swap" here, my best guess about what is going on here is that it is really just a secured loan and so barely a derivative at all.

Three, ask yourself, what is the purpose of this trade? I won't tell you the answer, because I don't know, but it sure seems to be for Venezuela to get some money for its gold without "selling" it. Which is the sort of sleight of hand that, as a bank, in 2013, you might want to avoid. Unless, again, it pays well.

1 Sherwood goes on, as well he might: "I’m not talking about legality here. Everything we did we felt was legal, but here we’re talking about what’s appropriate and what’s reputationally sensitive."

2 Here is an article from the Caracas newspaper El Nacional. Here is an article in English from Mineweb. Here is a post on Zero Hedge. So! There you go!

3 Multiple problems, apparently, but let's focus on this one.

4 Disagree? Let it all out in the comments. The important point is that neither is as useful as bitcoins.

5 Not in the bit I quoted, but in El Nacional:

Durante la vigencia del instrumento se constituye una cuenta llamada “de margen”, en la que el BCV se compromete a depositar una mayor cantidad de oro en el caso de que el precio del metal caiga o en la que Goldman Sachs depositará divisas cuando la cotización del oro aumente. “Al vencimiento de la transacción los aportes realizados son devueltos a sus propietarios”, señala el documento.

You get the idea.

6 I don't know what the Libor reference means. Plausibly Venezuela is paying Libor + 600 basis points; 7-year swaps are around 2.15% so 7yL+600bps is a bit over 8%.

7 I see 5-year credit default swaps on Venezuela at around 1200bps. There's a 2022 USD bond (ISIN USP17625AC16) yielding around 14%. So figure Venezuela's unsecured 7-year rate is around 13%. It's paying 8%. It's saving 5% a year in exchange for collateralizing 111% of the money it's getting with physical gold and posting margin if that collateral's value drops. Doesn't seem great.

One way to look at it is that this Venezuela could just sell 1.45 million ounces of gold for $1.8 billion and spend some of the money to buy call options on the gold price. Plugging in a 7-year term to XAUUSD [Curncy] OV in Bloomberg, and leaving all other fields at their default settings, I see an at-the- money call being worth about 25.5% of spot. So you can buy at-the-money call options on the full 1.45 million ounces, giving you all of the gold upside that you have now, for about $460 million. That's just over three years of interest on this deal -- and you've got no downside risk and no margin calls. Math:

Obvious caveats are (1) you probably can't actually buy $1.8 billion of long-dated at-the-money call options at the Bloomberg-default price, or possibly at all, (2) there's something reassuring about holding an actual pile of gold that you can't quite replicate with a call option, and (3) I've probably messed up the math. Still this deal seems pretty rich.

8 Because socialism. Also because the risk is wrong-way: They have to post margin when gold prices fall, and a lot of their foreign reserves are in gold, so you're gonna be asking them for margin at particularly bad times.

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