Bolivian central bank using Gold futures contracts to raise cash

Bolivia has been using its gold reserves to maintain its solvency as it struggles under a massive debt burden.

The Bolivian central bank has been buying gold from local miners, having it refined abroad (in Turkey), and then liquidating the bullion for dollars to service its debt.

Now, a new report indicates the country has leveraged its gold in another way.

According to a Bloomberg report, the Bolivian central bank raised $589 million by entering two gold futures contracts. The bank collected the money up front with the promise of delivering 5.4 tonnes of gold in one year.

The first contract, executed in May, was for 4.32 tonnes of gold. A second contract in August pledged 1.08 tonnes.

The bank reportedly sold three tonnes of gold through a similar hedge forward deal earlier this year, but the central bank did not disclose the amount raised. Bolivian analyst Luis Fernando Romero estimates the three operations combined brought in around $916 million.

The Bolivian central bank used the futures contract as a workaround. By law, the central bank must maintain a 22-tonne gold reserve. By pledging to deliver the gold later, the bank was able to access much-needed cash to pay its debt obligations, while buying time to accumulate the necessary gold.

In August, a statement from the central bank board indicated that it approved a “gold reserve accumulation plan” to meet “future obligations,” but included no details.

The Bolivian central bank has purchased a large amount of gold from domestic mines over the last few years.

According to the most recent data reported by Bloomberg, the bank has bought almost 24 metric tons of locally produced metal and monetized 44 tons since May 2023. The operations have generated around $3 billion.

Bolivia has significant gold reserves. Last year, the country produced 26.5 tonnes of gold, according to World Gold Council data.

Bolivia is one of a growing number of central banks buying gold from domestic sources. Most countries that source local gold use it to bolster and diversify their reserves. This strategy allows countries to grow their reserves using local currency.

By the same token, in the less likely event that the gold price falls significantly in the next year, the Bolivian central bank could come out ahead on the deal.

This futures scheme isn’t without risk. If the price of gold continues to appreciate, the 5.4 tonnes of gold could be worth significantly more than $589 million. This risk is inherent in any futures contract.

There are also political risks. The responsibility of delivering the gold will fall to a new government. Bolivia will hold a runoff election for a new president featuring a right-wing candidate and a centrist. This will end nearly two decades of socialist governance.

The central bank asserted that these operations have helped the country avoid default.

Large amounts of dollar-denominated debt burden Bolivia, and the country owns the lowest credit rating of any Latin American country, according to S&P Global. The country’s debt is rated Ca, defined as “likely in, or very near, default.” It is the second-lowest rating on the scale.

According to the agency, the country’s abysmal credit rating is based on its “reduced reserve levels” and its “weak capacity to fully meet its debt commitments over the next six to 12 months.”

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