Issue 2
Towards the Top Ten: Facilitating Venezuelan Gold Exports
In June 1995, the Central Bank of Venezuela (BCV) adopted a regulatory framework that facilitates the export of gold bars. The principle element of the regulation is that up to 60 per cent of gold produced in Venezuela can be exported in bars as long as at least 40 per cent of the amount produced is placed in the domestic market. In contrast to this more flexible policy, the BCV had previously only authorised the export of manufactured gold items (jewellery).
The major objectives that the BCV sought to achieve by enacting this regulatory change were to:
1) boost activity in the gold sector raising its share of the Gross Domestic Product
(GDP) through an increase in non-traditional exports;
2) attract foreign investment;
3) encourage overseas financing of large foreign-owned mining projects by allowing up to 60 per cent of gold production to be exported - this percentage is considered to be technically sufficient to cover commitments acquired from foreign financing sources;
4) satisfy domestic demand for gold;
5) strengthen the country's international reserves;
6) generate new jobs; and
7) raise the standard of living of the population in gold producing areas by improving the supply of goods and services.
In addition, under the new regulations the BCV may authorise exports of gold in forms other than bars after analysing the corresponding export applications.
The BCV is empowered by law to "regulate the import, export, purchase/sale and pledging operations for gold and its alloys, both in coins and bars, smelted, manufactured or in any other form." Accordingly, in 1986, the BCV decided to participate in the domestic gold market.
Among other strategic objectives, this decision was intended to:
1) take advantage of the sector's potential for generating foreign exchange for the benefit of the domestic economy;
2) build a transparent marketing structure to guarantee competitive prices for the various producers by buying gold at international prices and at the prevailing exchange rate;
3) bring order to a formerly chaotic market that, as a result, was difficult to regulate;
4) restrict mining contraband by creating a market for small sources of supply; and
5) diversify its sources of foreign exchange by carrying out operations in the international markets.
Consequently, in order to increase the Bank's involvement in the domestic gold market, gold buying centres were created in 1989. These buying centres were established in the gold producing areas by contracting commercial banks to provide this service. The buying centres were opened in those producing areas with the highest proportion of small miners.
Since 1986 - when it began its active participation in the gold market - through to 1994, the BCV has acquired an average of 11 tonnes of gold per year, representing about 75 per cent of total annual production of roughly 14 tonnes. At the beginning of the 1990s, as a result of the policy of territorial reorganisation and the new rules for granting mining concessions, the BCV began to evaluate the development of large-scale gold exploitation projects, both domestic as well as foreign-owned, some of which are already in the production phase. The most important of these include Monarch Resources' underground mine and the Placer Dome project which is expected to begin production in 1997.
In June 1994, Government established exchange controls with a fixed rate of exchange, aimed to protect the level of international reserves which had decreased owing to heavy outflow of capital, through the distribution and administration of foreign currency. As a result of the application of these exchange controls, the supply of gold from small mining operations was diverted to the informal or parallel market where prices are set based on black market quotes for the US dollar.
Despite the effect of the implementation of exchange controls on the gold market, there is significant foreign investor interest in large-scale exploitation projects because of Venezuela's enormous gold potential, estimated to range between 8,000 and 15,000 metric tonnes. Between 1994 and 1998, investments of $1.5 billion are anticipated in the mining sector for exploration, exploitation and production. According to studies, over the next few years Venezuela will become one of the top 10 most important gold producers in the world. This outlook, which attests to a promising future in Venezuelan gold mining, formed the basis of the BCV's decision to issue the "Rules Regarding the Export of Gold and its Alloys" in June 1995 in order to make it easier to export gold bars.
Jesús Arvelo is Head of the Central Bank of Venezuela's Gold Department in Caracas.