How Hard Is it for Governments to Get Rid of Their Gold?

Libya’s new central bank governor reported that Muammar al-Qaddafi had raised more than $1 billion to pay salaries to pro-government fighters in the final days of his regime by selling off 29 tons of gold from Libya’s reserves. How does one go about getting rid of that much gold?

If the gold’s not in an international market, it’s not easy. Qaddafi reportedly sold the gold from his treasury — mostly in the form of coins and smaller bars — into the jewelry market in Tripoli, with a good amount likely smuggled over the border into Tunisia. He also didn’t get a particularly good price –20 tons of gold should be worth more than $1.7 billion at current spot prices.

Governments and central banks hold about 16 percent of the world’s gold reserves, with the United States boasting the largest reserve. The vast majority of countries opt to keep their gold in banks in the major bullion centers of the world — London, New York, and Switzerland — where there’s actually high-level gold trading going on. But the Qaddafi regime was unusual in that it kept its gold in Libya. And in a country of only 6 million people, facing sanctions and the loss of oil revenues, there’s not much liquidity for a commodity like gold in Libya these days.

Given the hit Qaddafi took on the gold-to-cash conversion, it would seem that it’s an object lesson in why to keep gold reserves in international markets. And yet Venezuelan President Hugo Chávez raised eyebrows by proposing to repatriate $11 billion of his country’s gold reserves, currently held in various foreign banks — mostly in London. (Chavez seems to have given up on the idea, likely because of what a phenomenally difficult enterprise moving 211 tons of gold over an ocean would be.)

Pretty much the only reason for a government to keep its gold so close at hand is if it’s expecting international sanctions, which would prevent it from accessing its foreign reserves. In this sense, Qaddafi’s decision to keep his gold at home actually turned out to be prescient when his country fell into revolution and he was hit with tough international sanctions.

So where’s Qaddafi’s gold going to end up? Hard to say. Gold that’s kept in vaults in a major bullion center has to conform to standards set by trading bodies like that London Bullion Market Association, which monitor both the quality of the gold and keep track of transactions — in theory, to assure that no gold involved in criminal enterprises makes it into the official global market. Laws such as the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act also aim to keep "conflict gold" off the market. The gold sold by Qaddafi obviously won’t meet these standards, another reason why the Libyan government may have had trouble finding buyers.

Ultimately, of course, the gold will find its way back into the system. Pretty much all the gold that’s ever been mined is still in circulation in one form or another– if melted together into one cube it would weigh about 165,600 tons but would only be about 20 meters on each side.)

Leaders like Qaddafi and Chavez will rise and fall, but their gold will remain behind.

Thanks to Adrian Ash, head of research at BullionVault, a London-based gold-trading service.