[heading]Ecuador Transfers Gold To Goldman Sachs For Cash[/heading]
Ecuador’s transfer of over half its known gold reserves to Goldman Sachs Group Inc. for three years, in order open up cash for the South American nation, will see the central bank sending 466,000 ounces of gold to Goldman Sachs, worth approximately $580 million at current price levels. The nation expects to get the same amount back three years from now in exchange for the cash. Ecuador, in return, will receive “instruments of high security and liquidity” and anticipates to earn a profit of $16 million to $20 million over the three years for lending her gold.
The central bank did not detail additional terms of the transactions, including feeds or financing costs paid to Goldman Sachs. Five years ago Ecuador defaulted on $3.2 billion in bonds. The recent move with Goldman Sachs comes as the South American nation must meet a budget deficit of approximately $4.94 billion. In April, President Rafael Correa said he planned to sell approximately $700 million of foreign debt this year in the country’s first international bond sale since Ecuador’s 2008 and 2009 default.
“Gold that was not generating any returns in vaults, causing storage costs, now becomes a productive asset that will generate profits,” the central bank said in the statement. “These interventions in the gold market represent the beginning of a new and permanent strategy of active participation by the bank, through purchases, sales and financial operations, that will contribute to the creation of new financial investment opportunities.”
Ecuador’s gold reserves fell by $605 million – 55% – down to $493 million in the week ending May 23, according the central bank’s website. The bank had about 845,000 troy ounces of gold as of April 14, according to Bloomberg. In a 2008 constitutional referendum the bank was formally stripped of its sovereignty.
In what would have been a similar move a few years ago, Goldman Sachs proposed a swap with Venezuela of $1.68 billion in cash to be backed by $1.85 billion of that country’s gold, according to documents obtained by Bloomberg News. The deal, which failed to go through, carried an interest rate of 7.5% plus the three-month London interbank offered rate.
Clearly Ecuador needs cash. And clearly Goldman Sachs can afford such a loan since it gets such cash at zero cost from the Federal Reserve.
Is Goldman Sachs Worried About Gold Hoarding?
The People’s Bank of China, China’s central bank and also the biggest buyer of gold, apparently has Wall Street worried, according to Chinese-language financial news site BwChinese, citing a Hong Kong financial analyst.
Leung Hai-ming told the website that China’s central bank arbitraged the US Federal Reserve’s quantitative easing program in 2013, as the price of gold fell by 27%. The bank bought more than 1,000 tonnes of gold, nearly one third of the world’s total tonnage.
Leung continued by saying that the US Federal Reserve loans gold to investment banks like Goldman Sachs, Citibank, JPMorgan Chase, Morgan Stanley and others every year to trade. This suppresses gold prices. When price are in their favor, investment banks buy back the gold and return it to the Fed.
But China continues to buy, the price of gold continues going up. The People’s Bank of China, it seems, is putting pressure on Washington and Wall Street by forcing up the price of gold.
Is there a panic setting in in Wall Street, causing shake ups in the gold industry and such moves as Goldman Sachs taking in so much of Ecuador’s gold? I do not know. And maybe not. But it is something to consider.