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Plunging Gold Prices a Major Concern for Venezuela

Why is Venezuela so worried about the price of gold? Because the country’s ability to repay foreign bondholders largely rests on gold prices that are higher than current levels.

Before former Venezuelan President Hugo Chavez died, he stockpiled more than 70 percent of the country’s foreign reserves in gold by 2012. That’s the highest percentage of any emerging market country. He believed that the country should move away from the “dictatorship of the dollar,” which, at first, paid off. An almost 400 percent rally in gold over the past decade made the policy look brilliant but this year’s 25 percent tumble in the price of gold has caused analysts to voice concern over the country’s ability to pay foreign bondholders.

The yield on the country’s dollar-denominated debt has risen 62 basis points to 11.84 percent. According to a report in Bloomberg:

“Venezuela’s reserves have taken a big hit,” Francisco Rodriguez, an economist at Bank of America Corp., said by phone from New York. If current gold price levels continue, “then you will see an increase in perception that Venezuela’s capacity to pay is weakening.” The country’s reserves have fallen below $25 billion–down from nearly $30 billion last year.

The U.S. Federal Reserve will eventually taper bond purchases and this, along with lower exports of oil could continue to put pressure on the country’s ability to pay.

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