Hugo Chavez, president of Venezuela, started 2010
off by devaluing the Venezuelan bolivar by 50% from 4.3 per dollar to 2.15
per dollar, along with several other silly little limits. This is
continuing the theme of currency devaluations from late 2008 and 2009.
But the evaporation of currency is not only limited to third world
socialist governments with eroding infrastructure but also happening to every
major currency. For cash balances the precious metals are the only
refuge.
EVAPORATED CURRENCIES
The speed with which currencies can lose their
purchasing power is astonishing. For example, on Tuesday 3 February
2009 it took 109,759 tenge, the Kazakhstan currency, to purchase one ounce of
gold. On Thursday 5 February 2009 it took 123,346. And that was
small compared to the bolivar’s evaporation.
On 4 March 2009 the Armenian Dram went poof
losing 30% of its value, shortly later on 15 April 2009 the Fiji dollar lost
20% in a devaluation event and in November it was Vietnam
dong. In October 2008 the Iceland Krona went poof which has
harmed the infrastructure and led to civil unrest in Iceland.
During 2008 the British Pound went poof and hundreds of years ago the
Continental Dollar went poof prompting the Founding Fathers to craft
particular monetary powers and disabilities in the United States
Constitution.
GOLD AND SILVER CANNOT EVAPORATE
Water’s boiling point is 99.974 °C or
211.95 °F. The average temperature on the surface of the earth
is 15 °C or 59 °F.
Gold’s boiling point is 2,856 °C
or 5,173 °F. Silver’s boiling point
is 2,162 °C or 3,924 °F. The temperature on the surface of the
sun is 5,400 ºC or 9,800 ºF. Additionally, gold is
extremely resistant to corrosion and can sit at the bottom of the salty ocean
for centuries and still retain its luster.
I suppose gold could go poof on the surface of the
sun but on earth physical gold cannot evaporate when used as a currency
in ordinary daily transactions or when hoarded safely in vaults. At all
times and in all circumstances gold remains money. When the Zimbabwe
dollar evaporated the people quickly found out you can always trade gold
for bread; assuming there is bread available which is an excellent reason to
follow provident living principles and prepare for survivalism in the
suburbs.
On 20 May 1999, Alan Greenspan testified before Congress, “Gold is always accepted
and is the ultimate
means of payment and is perceived to be an element of
stability in the currency and in the ultimate value of the currency and that historically
has always been the reason why governments hold gold.”
GOLD’S 2009 PERFORMANCE
I always get a chuckle out of the paper bugs who
cling with so much tenacity to their little colored coupons. So to the
paper bugs, do you like numbers? How do you like them
numbers? (from the
Academy Award Winning Goodwill Hunting) I am waiting for gold to be
devalued to $0 so that I can buy all of it.
The results become even more stark when using gold
as the numeraire, or presentation currency under International
Accounting Standard 1. I shudder to think of the change in a
Venezuelans financial statements in a single day from this devaluation if
most of their wealth was located in Venezuela. But the income statement
and balance sheet destruction is not limited to Venezuelans but taking place
in all major currencies.
VENEZUELA’S ERODING INFRASTRUCTURE
One unfortunate consequence of fiat currency and the
attendant inflation is the result of misallocation of capital that leads to
malinvestment and in many cases neglect of important infrastructure. Venezuela
is no different.
Venezuela’s electrical infrastructure, heavily
reliant on hydroelectric with 73% coming from the Guri Dam which has been
seriously enervated by a drought and has already been neglected,
underdeveloped and overuse for years. Venezuela’s mushrooming
demand coupled with shrinking supply is resulting in a slide towards darkness
with several major electricity failures in 2008 and 2009 with unplanned
blackouts and brownouts reminiscent of California’s.
With the Guri Dam’s water levels at extremely
depressed levels Columbia has cut natural gas exports about 70% from 7
million cubic meters per day to a paltry 2.3 million. At the same time
Chavez has implemented subsidies which have resulted in increased demand. Coupled
with theft the electrical usage per capita is among the highest in all of
Latin America with national demand around 17 gigawatts.
Because of neglect of the infrastructure it has
become increasingly inefficient with tremendous amounts of electricity being
lost or stolen by the typical Latin creativity where they just tap into the
power lines with makeshift wiring systems. Because the low utility
prices artificially stimulate demand and lead to less resources for the
electricity producers therefore their ability to police the lines is greatly
hampered. With consumption barely below production the system is
extremely vulnerable to spikes which can cripple the system in a similar way
to what happened in the gigantic 2003 blackout in the US Northeast that affected about 55 million people from Toronto to New York City.
Price controls lead to shortages and shortages lead
to rationing. Venezuela is no
different and announced in December 2009 electricity rationing
requirements. Due to the power being cut off there have been tremendous
production complications; particularly among the metals industry
with some aluminum producers cutting as much as 40% of their production.
Gold production will likely continue trending lower also. What is next for Venezuela?
A typical response from a vampire squid criminal costumed in government
regalia would be to implement aluminum rationing.
There is no feasible substantive solution to the
electrical crisis in Venezuela. Like almost all crisis this one is
created by governmental intervention in the market and after initial negative
unintended consequences the government interferes more causing even more
negative effects. This is a prime example of how government is a weapon
of mass wealth destruction.
And because America is implementing similar policies
therefore it would be irrational to think America will have different
consequences. Just wait until your 104k, IRA or other type of
retirement account gets nationalized to support United States Treasuries.
There is comfort in the thought that at least you will not be able to
boot up your computer to check your balance!
CONCLUSION
The fiat currencies represent the common stock of
governments and all are evaporating which is predictably leading to civil
unrest. In response, governments which are weapons of mass wealth
destruction, respond with draconian measures like Venezuela has done with
price subsidies, rationing and currency devaluation and these measures
further exacerbate the situations. Such customer service is to be expected when your
enemy is your customer.
Of course, Venezuelans could have protected
themselves by casting the ultimate
vote of no confidence in Chavez and buying gold. At
least then their capital would not have evaporated. This is just the
prelude to 2010 which will be an interesting and exciting year!
DISCLOSURES: Long physical gold, silver and platinum with no position the
problematic SLV or GLD ETFs.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
|