What Is the Milei Government Doing With Argentina’s Gold?

Argentina’s cash-strapped central bank has around two million troy ounces of gold in its vaults, valued at around $4.5 billion. Or at least it did.

Where is Argentina’s gold?

This is a question that began doing the rounds, particularly in Argentina’s financial media, a few weeks ago. The Secretary General of the Banking Association and deputy, Sergio Palazzo, had just made a FOIA request to the Central Bank of the Republic of Argentina (BCRA) asking the bank to confirm whether “operations to send gold bullion abroad had taken place during the month of June.” More specifically, he asked if transfers of gold had been made on June 7th and 28th using the Lumil transport company and British Airways.

Palazzo also asked the BCRA to provide details of the amounts involved, their ultimate destination, and the officials and administrative procedures behind the operations. The BCRA had 30 days to respond. Three weeks on, it still hasn’t done so. But on July 19, Argentina’s Minister of Economy (and former JP Morgan Chase and Deutsche Bank banker) Luis Caputo confirmed that the operation had indeed taken place. He even tried to present it as a shrewd financial move, rather than what it really was — the pawning of part of the nation’s gold, initially under the cover of darkness:

“It is a very positive move, because today you have gold in the BCRA that is like a piece of property that cannot be used for anything. If you have it abroad, you can generate returns. It is much better to have it stored outside, where they pay you something for it.”

As El País reported days later, the words implied that the purpose of the shipment was to deposit the gold abroad and earn interest, presumably on carry trades — in which case, the newspaper noted, the yield is very low. Some economists have warned that the logistics of the transfer, including the transport costs and insurance payments, render the operation pointless — unless, of course, it is serving a different purpose. Days later, Argentina’s President Javier Milei implied that the gold was actually needed as collateral for a “bridge loan”. From El País:

The president said that Argentina already has the dollars available to pay next January the maturity of interest on foreign debt for some 1.6 billion dollars. In addition, he stated that a Repo has been agreed to pay capital owed for about 3,000 million dollars.

Gold for Debt?

For the moment, it is far from clear what the shipped gold is being used for. Meanwhile, the shipments of Argentina’s gold bars have continued. On July 29, La Politica Online reported that “Caputo had sent another shipment of gold to London”, then on to Basel, all with the ostensible aim of securing a $1 billion repo loan and rebuilding the central bank’s currency reserves:

The scene repeats itself: late at night, a cash transport service loads gold bars onto a commercial plane bound for London. The final destination of the metal is Switzerland where the Bank of International Settlements will offer it as a pledge to investors willing to put up fresh funds…

Once again the government is going to send gold from the Central Bank’s reserves as reinforcement for a repo loan of about $1 billion through Basel… In such an operation, a financial institution sells an asset to an investor with the commitment to buy it on a certain date at a certain [NC: as in, higher] price.

“It is a short and expensive loan,” a source from the financial sector told LPO, adding that “it shows the level of distrust in Argentina, in that it has to pawn grandma’s jewellery to get a few dollars of debt.”

What’s more, sending that gold across the Atlantic puts it at risk of seizure by creditors. As readers may recall, London — and more broadly, Europe — are hardly the safest places to store gold reserves and other sovereign assets these days. In 2019, the UK government impounded Venezuela’s roughly $2 billion of gold deposits stored at the Bank of England after “derecognising” the Venezuelan President Nicolas Maduro in favour of the US- self-appointed Juan Guaidó. Even after Venezuela’s leading opposition parties voted to oust Guaidó in 2023, the UK continues to hold on to Venezuela’s gold deposits.

With Argentina facing numerous lawsuits over unpaid bills and debts, including one concerning the former Cristina Fernández de Kirchner government’s expropriation of roughly half of national energy company YPF, the risk of part or all of Argentina’s gold being seized is not negligible, as Palazzo himself warns:

“The gold in transit may be seized by any judge who eventually orders a seizure for any of the cases Argentina has pending abroad. It’s an unnecessary risk being run, and [the central bank] should clarify to us Argentines the reason for this transaction, whether it is to exchange the gold for foreign currency in another country, or whether it is a credit operation, or whether it is a purchase and repurchase operation with the International Payment Bank.

Why Now?

Market analysts believe that the government needs this repo in order to cover the loss of the BCRA’s currenty reserves, which Milei’s economic team have burnt through in a (likely vain) attempt to keep the dollar in check. The government is desperate for fresh money from the IMF while struggling to service the roughly $40 billion it still owes the Fund. According to an article in Argentina’s largest newspaper Clarín, Milei is hoping that a Donald Trump victory in the US elections will allow him to expand Argentina’s debt with the IMF.

Libertarian Deputy José Luis Espert estimated that a “minimum” of US$ 10,000 million of additional net reserves is needed to accelerate the exit from the current crisis. Otherwise, he explained, the path will be “more gradual.”

However, the Republican candidate’s adviser, Mauricio Claver-Carone, last week criticized the Milei government for “spending reserves” and warned that it is an “illusion” to expect more money from the organization. Thus, without clear signals from Washington, the Minister of Economy, Luis Caputo, is pursuing other ways of creating a financial “cushion”.

The profligate use of the BCRA’s already limited reserves by Milei’s economic team to contain the rise of the dollar in relation to the peso has left the central bank with precious few tools left in its box. Its rainy day funds have been compromised by the government’s efforts to reduce the exchange rate gap between the US dollar and the Argentine peso — efforts that are likely to prove futile and short-lived anyway. In other words, more of Argentina’s gold is likely to be heading overseas in the coming months.

History Repeating?

This is not the first time an Argentine government has done this. In 2017, the Macri administration transferred 11,000 kilos of the precious metal to London in order to take advantage of carry trades on the metal. According to Clarín, the bars were rented on international markets and reinvested in more profitable trades (a yen swap is usually chosen), thus generating a carry trade. Then, as now, the gold was at risk of being seized by vulture funds and other creditors.

That gold is purportedly still sitting in the vaults of the Bank of England, where in August, 2023  it was used as collateral for a repo loan issued in dollars by the Bank of International Settlements for payment to the IMF. La Nación noted at the time that the “operation with gold is perhaps the most controversial of the set of measures that the government is deploying in the context of the dollar crisis.”

During the government of Milei’s political idol, Carlos Menem, in the 1990s, the BCRA sold Argentina’s entire gold reserves, transforming 124,417 kilograms (4 million ounces) of the yellow metal into $1.485 billion of cash (it would take the governments of Nestor and Cristina Kirchener around ten years to rebuild Argentina’s gold reserves to where they are now). In 1997, Clarín reported that the money earned from the gold sales was reinvested in US Treasury Bonds, which yielded a rate of 5.5% per year; the gold reserves, by contrast, yielded nothing:

[G]old is falling into disuse as a reserve for central banks. Instead of having mountains of gold stashed at the central banks, which requires significant investments in both physical space and security measures, central banks prefer papers that are far less costly to hold while also yielding interest. For the same reasons Australia, Belgium and the Netherlands have been selling their gold over the past two years.

Readers may recall that between 1999 and 2022, the UK’s then-Chancellor of the Exchequer Gordon Brown would more than halve the UK’s gold reserves in a series of auctions, when gold prices were at their lowest point in 20 years, after a long bear market. The period has been dubbed by some as Brown’s bottom.

Times have changed since then. The gold price has increased at an average of 8% annually since 1999. Most central banks, rather than selling or pawning their gold, are accumulating it as a safe haven in a time of rising volatility, high inflation and slow decline of the USD as the global reserve currency. What’s more, as geopolitical tensions surge around the globe, capital markets are seeing a repatriation of gold, with India and Nigeria among a number of countries to recently bring back their gold from US or UK vaults.

In 2023, Reuters cited an Invesco survey suggesting that countries are repatriating their gold reserves to insulate themselves against the sort of sanctions imposed by the West on Russia. Since then, of course, the EU has expropriated the profits from frozen Russian assets to help Ukraine.

Ricardo Aronskind, a researcher and professor at the General Sarmiento National University, warns that “Caputo’s [transfers of gold] are out of synch with this broader trend, with many countries increasing their gold reserves as insurance against possible disruptions in the world economic order.”

But Argentina is already in deep crisis mode — indeed has been since taking out the biggest ever IMF loan in 2018, worth $57 billion, and then proceeding to default on its debt twice over the next two years. The transfer of part of its gold reserves abroad, presumably as collateral for a short-term loan, underscores the critical situation of its finances as well as the lack of a coherent and sustainable economic plan. It not only compromises the country’s financial security, by heightening its risk of asset seizures, but also undermines the confidence of international investors.

Milei’s Trilemma

One of the big problems with the Milei government’s economic plan for Argentina is that it is based on a “trilemma” of policy goals, as Argentine economist Juan Manuel Telechea recently explained in El País. Those three policy goals:

1. To bring inflation under control. By sharply reducing the amount of money in circulation, through a brutal fiscal adjustment as well as a rapid slow-down in central bank money issuance, the Milei government has managed to bring inflation down from a monthly rate of around 25% in December, 2023, to around 4-5% today, which is where it seems to have settled. It is an impressive feat as long as one ignores the costs.
2. To accumulate sufficient international reserves, which is key to stabilising the peso’s exchange rate as well as servicing Argentina’s outsized debt, much of which is scheduled to come due in the next year or two. At the moment, the BCRA claims to have negative net reserves of roughly -$4 billion dollars though analysts suggest it may be lower than that.
3. The third policy goal is to remove the myriad currency exchange restrictions that have been put in place in recent years, which is necessary to attract investment and/or obtain external financing. Next year, the government faces $17 billion in foreign currency-denominated debt maturities. To pull that off, it will need to obtain financing and/or attract foreign investment. And that will require removing exchange controls, which it is being urged to do by the IMF.

All of these three policy goals (reducing inflation, accumulating international reserves and removing currency exchange controls) are, in and and of themselves, laudable. The problem, as with all trilemmas, is that they are not all mutually compatible, explains Telechea:

If the government wants to lower inflation and for the BCRA to accumulate international currency reserves, it must maintain the currency exchange restrictions. After all, these restrictions essentially enable the purchase of dollars (for the population’s savings and remittance of profits by foreign companies), so they are crucial both in terms of keeping the exchange rate stable (key to driving prices down) and allowing the BCRA to accumulate reserves.

On the other hand, if the government wanted to remove all exchange controls and accumulate dollars, inflation would increase [NC: as has recently occurred in Nigeria]. Let us remember that the practical prohibition on the purchase of dollars generated a parallel exchange rate [NC: the so-called “blue dollar”] higher than the official one (currently this gap is 40%), so the elimination of these regulations would trigger a devaluation of the peso of that magnitude. While this would favour the increase in exports and the possible entry of foreign investments (increasing the BCRA’s international reserves), it would also cause a surge in inflation.

Finally, if the government wanted to eliminate exchange rate regulations without causing an inflationary jump, it would have to reduce the exchange rate gap to a minimum, so as to avoid a spike in the official exchange rate.

This has already led the BCRA to go out and sell dollars in the markets, causing the price of dollars to fall but in the process sacrificing the central bank’s scant reserves, which are now well into the red. According to the central bank itself, the negative balance is -$4 billion. Market analysts suggest it could be almost double that. That is presumably one of the reasons why the BCRA is offering part of Argentina’s gold reserves as collateral for obtaining fresh funds from investors. But the central bank still hasn’t responded to Palazzo’s request for information about its latest gold transfers.

Most concerning of all are reports that the central bank is burning through not only its own reserves but also bank reserves — the cash minimums that financial institutions must have on hand at the central bank in order to meet liquidity requirements. Cash reserves requirements are intended to ensure that every bank can meet any large and unexpected demand for withdrawals, and should never be touched apart from in a banking crisis. Yet according to data for the city of Buenos Aires cited by La Politica Online, the bank reserves were also in the red to the tune of $734 million.

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* Economic activity in most sectors has contracted sharply. Argentina is now in a severe recession, if not outright depression. Poverty levels are at their highest (55%) since the country’s last economic collapse 20 years ago, according to a new study by the Catholic University of Argentina. Twenty percent of the population are mired in “destitution,” meaning they cannot adequately cover their basic food needs. According to the study, “the child poverty and destitution rates have reached almost record levels: 7 out of 10 children live in a poor household, while 3 out of 10 live in a destitute household, that is, with an income that does not even cover the value of a Basic Food Basket.”

Of course, not all of this can be blamed on Milei’s crushing austerity policies — Argentina’s worsening economic crisis has been the cumulative result of years of bad economic policies — but much of it can. Milei’s economic shock therapy has, as intended, significantly exacerbated economic conditions for many, if not most, people and small businesses, particularly those in industrial sectors.