Real Wealth #253 01/19/2010
A Lesson for the United States Government on the Devastating Destructive Power of Monetary Devaluation
Dear Gold & Energy Advisor Subscriber,
In 2003, I wrote the book, The New Bull Market in Gold: $1000 Gold and the many ways to profit from it. Since then in this investment advisory, I have continuously written about the dangers of inflation, stagflation and, of course, monetary devaluation.
Over the recent Christmas and New Years holiday, I did a series of interviews at a good number of domestic financial news networks including CNBC, FOX Business, Bloomberg and The Street.com. While it’s stimulating and exciting to appear with the likes of Larry Kudlow, Joe Kernan and David Faber, the message I delivered was not good news.
The financial media that quotes me worldwide has been impressed with my predictions: first of $1,000 gold when it was below $400 an ounce, and then again in 2009 when my prediction of $1,200 gold (when gold had dipped mid year) was attained. They are, however, not fawning over my warnings that not only will gold hit $1,500 this year, and there’s a growing danger that we may see a spike in the price of gold to $2,000 or more as the direct result of a monetary panic. Trust me this is NOT what Wall Street wants to hear.
Bottom line: the United States’ debt is spiraling out of control as the government tries to stimulate our economy out of recession. Increasing taxes, the rapidly growing size of the government and its spending and printing money to bail out financial institutions and private industry only to see its executives take the largest cash bonuses in human history amounts to economic insanity.
Literally, every reporter who interviews me asks me whether it will be inflation that fulfills my prediction of $1,500 gold in 2010 and my longer term warning of $5,000 gold on the horizon. The answer is yes; but my biggest fear is that $5,000 gold will become a reality as a result of a monetary crisis/collapse.
The price of gold just tripled in Venezuela, as an inevitable monetary devaluation has taken place in the last few days.
In my warnings about a monetary crisis, I have pointed to the massive devaluations throughout South and Central America as well as Mexico, Eastern Europe and Africa since the end of World War II. There have been so many currencies that have disappeared completely all for the same reasons. These reasons are no better illustrated than by the events taking place in Venezuela right now.
President Hugo Chávez has hysterically spoken out against the United States, its Western Allies and Capitalism since rising to power in Venezuela more than a decade ago. All the while fueling his socialist revolution by the nationalization of key industries while at the same time exponentially increasing government spending and imposing currency and price controls. A recipe for an eventual economic disaster that anyone who has completed even a community college course in macro-economics should recognize.
While the cracks in the economic landscape of Venezuela have been steadily becoming clearer and more severe – for example: 2010 began with the rationing of electricity – the Latin American nation’s infrastructure is slowly collapsing under the weight of the socialist revolution’s inefficiencies. Step by step, Chávez has emulated his socialist hero, Fidel Castro, and has killed the entrepreneurial mindset in Venezuela and set the course of his oil- and resource-rich nation on the path of insolvency, bankruptcy and collapse.
To be sure, Chávez has been emboldened by the economic crisis that erupted world-wide in September of 2008, despite the fact that the troubles facing the Venezuelan economy have accelerated. Regardless of the growing dire economic situation, Chávez has been increasingly arming his military with state of the art weapons of war from
The bills are starting to become due for Hugo Chávez’s socialist revolution. Just as the new year was kicking off, Chávez was forced to impose a massive devaluation of its currency in a desperate attempt to shore up his corrupt government’s finances and stimulate economic growth before key elections later this year.
Mr. Chávez's two-year-old "Strong Bolivar" currency value has been cut in half literally over night – to 4.3 per dollar from 2.15 per dollar – for most imports and transactions. The central bank will also subsidize a stronger 2.6 per dollar rate for imports of food, medicine and other essential items; but even that modest subsidy will not do much to soften the economic impact of this devastating devaluation. Further, the black market rate for U.S. Dollars, a more accurate representation of this devaluation, is pegging the exchange rate at over 6 bolivars - a devaluation of not 50% but 75%. In terms of the buying power of the Venezuelan Bolivar, the price of gold has tripled.
It’s important to point out that this is the second massive devaluation and that little more than two years ago, Mr. Chávez chopped three zeros off the old currency and declared the beginning of an era of monetary fortitude and renamed his nation’s currency the "strong Bolivar".
This past week, the Wall Street Journal pointed out more of the short term benefits of Chávez’s devaluation of Venezuela’s currency...
“The staunchly anti-U.S. leader is gambling that the benefits of a weaker currency will offset faster inflation, which threatens the purchasing power of his mostly poor backers. Finance Minister Ali Rodriguez said devaluation, which makes the price of imported goods more expensive in local currency terms, may add 5 percentage points to the 27% inflation rate – already among the fastest in the world.
“In Mr. Chávez's favor, the massive devaluation helps narrow a growing budget shortfall, could provide limited short term relief to a moribund local industry, and instantly gives his oil-rich government more local currency to spend per barrel of oil exported by the state petroleum company, PDVSA. That's a key consideration with Congressional elections looming in September.
“The 55-year-old former soldier's popularity has slid amid corruption scandals, a shrinking economy, rising crime and shortages of food and electricity. Increased spending could paper over some of these problems and boost Mr. Chávez's popularity.
“Devaluation brings "more room to increase public spending as way to spur economic activity," says Maikel Bello, an analyst with the Caracas-based research firm Ecoanalitica.
“This year's congressional elections are especially important because, after previously boycotting some elections to protest Mr. Chávez's growing power over democratic institutions in Venezuela, traditionally fragmented opposition parties are making a push to dramatically improve their representation in Congress.
“In theory, the devaluation could fortify Mr. Chávez on a range of fronts. Announcing the devaluation on state television, Mr. Chávez predicted that a weaker currency would breathe new life into a domestic economy that has become almost totally dependent on imports for everything from beef and milk to automobiles during his 11-year presidency.
“Devaluation "will give a boost to the productive economy, will stop imports that are not strictly necessary and will stimulate exports," Mr. Chávez said.
“The measure may buttress the banking system, which has been rocked by the closure of several institutions amid an embezzlement scandal. Many Venezuelan banks head into the devaluation holding large stocks of dollars.
“Holders of dollar-denominated bonds issued by Venezuela and PDVSA will be encouraged by the move. Devaluation narrows Venezuela's financing gap to around 3% of economic output from around 7%, according to Royal Bank of Scotland economist Boris Segura. "This is good news," said Mr. Segura.”
While this all may be true, the devaluation does little to assuage the deeper problems plaguing the Venezuelan economy and will serve only to exaserbate the seriously mounting economic problems. The devaluation will do absolutely nothing to revive the country’s manufacturing base that is literally collapsing under the weight of a hostile operating environment. What investor in his right mind is willing to hurdle Venezuela's maze of price caps, currency controls and the ever-present fear of further nationalization?
Proving my point. On Sunday Chávez ordered Sunday the seizure of a French-owned retail chain on accusations that it raised prices after Venezuela devalued the currency by half.
"Until when are we going to allow this to happen?" Chávez asked during his Sunday television program in reference to the alleged price hike by Almacenes Exito SA, headquartered in
The Venezuelan leader said that new law may need to be approved to carry out the nationalization. "I'm waiting for the new law to begin the expropriation process," he said. "There's no going back," he added. Bottom line: Chávez is going to literally STEAL every asset, company, business, in the company in the name of his socialist revolution.
This will not change the reality that devaluations like the one imposed by Chávez two years ago and at the beginning of this new year tend to continue and worsen inflation instead of curing the scourge. Subsidizing the dollar rate for importing food, medicine and essential items eliminates any incentive for Venezuelans to produce what they need most. It will almost certainly remain cheaper to import beef from Brazil, for example, than to produce it.
Since Venezuela no longer produces meaningful amounts of food, medicine or other basic goods under Mr. Chávez, this devaluation doubles the price of imported goods making them FAR too expensive for his mainly poor constituents. He can of course nationalize every foreign retail store chain but all that will do is completley elimnate the importation and sale of any foreign good. (Who is John Galt?)
Chávez nationalizations and monetary devaluations are not fooling everyone because the tremendous weakness of the Venezuelan economy is becoming even for the poor to ignore. Venezuela is increasingly grappling with chronic energy and water shortages. Now in his 12th year in power, Chávez has the support of half of the country's 28 million people, polls show, but rising inflation would most hurt the lower classes that are the pillar of his movement.
"The typical Venezuelan is saying, 'My savings are going to be worthless,' " said Robert Bottome, editor of the business newsletter Veneconomia in
Official devaluations are nothing new for Venezuelans with many getting their first taste of currency controls in 1961. The peg imposed then was kept for 22 years; but a decline in oil revenue forced the government to devalue in 1983, marking the beginning of a downward spiral that included several adjustments to the foreign currency rate. Devaluation in 1994 amid a deep economic crisis spurred a wave of popular unrest that Chávez eventually tapped into to win the presidency five years later.
Investors, and for that matter, all citizens of these United States of America should pay VERY close attention to Hugo Chávez and his government’s sudden monetary devaluation. While Venezuela is small by comparison to the United States, this little Latin American country is showing the dangers of allowing its financial system and its free market to be so undermined by rampant uncontrollable, and yes, corrupt government spending. The end result: crippling inflation and a monetary crisis that ends in a devastating devaluation.
Some of you may be saying there are more differences between the U.S. and Venezuela, and yes there are differences, but the similarities are striking:
The result is a collapsing currency.
The main point I want to make is this: just as the devaluation caused the price of gold to triple for Venezuelan citizens, a collapse in the dollar will cause gold to increase in price for U.S. citizens.
As we continually write about in our weekly Updates, the dollar index has rallied to 79 from its low of 72. Now is an excellent time to buy gold on the dollar rally. We believe the dollar will test 72; and once broken, the dollar could collapse, making gold much more expensive for U.S. citizens. Take advantage of this opportunity.
Venezuela’s economic crisis will have little impact on the world economy, but a similar crisis in the United States would have worldwide economic, social and political consequences from one end of the globe to another. $5,000 gold would only serve as an expression of the devastation. The destitution of those without gold, holding only devalued U.S. Dollars, Euros and other deflated flat paper currencies would be nightmarish.
This growing danger is the reason I implore all investors to put 15% of their investment savings into physical gold. Start with shifting to physical gold into your IRA!
As we start the New Year, allow me to remind you that you can put physical gold in your IRA; and the precious metals staff of Finest Known, LLC can help you still fund or transfer your IRA monies to physical gold, platinum and silver for 2009 and for 2010. Simply call my offices at 1-866-697-GOLD (4653).
P.S. I'm mad as hell and hope you are as well. In the past few days besides decapitating the Venezuelan economy with this latest devaualtion and nationalizing a French company's retail store chain in a futile attempt to cover his own incompetence. This two bit excuse of a human being Hugo Chávez has accused the United States of using the Haitian Earthquake mega disaster as an pretext to military occupy this tiny devastated country. What has me upset is that at the same time Chávez is accusing the United States of invading Haiti the Obama administration has been conducting meeting(s) with Venezuelan Foreign Minister for Latin America and the Caribbean, Francisco Arias Cardenas in Washington at an undisclosed location for the purpose of working together to fight against misery, poverty, narco-trafficking and violence.
Hugo Chávez is NOT to be trusted. He has supported narco-trafficking and violence, fuel the economuc misery and poverty in not only his company but throughout Latin america and has been promoting violence in Columbia - to the point of attempting to aid Colmbian Rebels in the acquisition of a nuclear weapon.
The Obama Administation is niave and making a grave foreign policy mistakes attempting to engage this meglamanic. The next thing we'll probably see is the Obama Administation entertaining a finanical bail out for Venezuela. I hope I'm wrong, frankly if Obama and the Democrates attempt to continue to placate Iran and embark on placating Hugo Chávez, Obama will not be relected in 2012. A weak economy and a weak national security performance will drive independents who voted in Obama in 2008 back to the GOP.
P.P.S The Finanaical Times of London is featuring this morning what I conder to be a further affirmation of the many articles and issues I have writen during the past almost six year of the dangers of social, economic and military conflict with China. Gideon Rachman is one of FT's international affairs columnists and this latest piece deserves your attention as an investor.
Gooldes clash with Chines is about much more than the fate of a single, powerful firm. The company’s decision to pull out of China, unless the government there changes its policies on censorship, is a harbinger of increasingly stormy relations between the US and China.
The reason that the Google case is so significant is because it suggests that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong. The US has accepted – even welcomed – China’s emergence as a giant economic power because American policymakers convinced themselves that economic opening would lead to political liberalisation in China.
GIDEON RACHMAN'S BLOG:
Read the FT’s international affairs columnist’s authoritative and lively commentary throughout the week
If that assumption changes, American policy towards China, could change with it. Welcoming the rise of a giant Asian economy that is also turning into a liberal democracy is one thing. Sponsoring the rise of a Leninist one-party state, that is America’s only plausible geopolitical rival, is a different proposition. Combine this political disillusionment with double-digit unemployment in the US that is widely blamed on Chinese currency manipulation, and you have the formula for an anti-China backlash.
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