Reading time: 6 – 10 minutes
Hugo Chavez, president of Venezuela, started 2010 off by devaluing the Venezuelan bolivar by 50% from 2.15 per dollar from 4.3 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 implement 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 leads 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 measure 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.
Chavez Evaporates Venezuelan Bolivar And Leads Country Into DarknessRELATED POSTS:
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- Platinum Liquidity Increases
- Help Out Someone With Past Posts
- Gold And The Oil Majors Revisited
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{ 9 comments… read them below or add one }
Gold is the true value of money, BUT as the price of gold (appears) to rise, the currency it is valued in is ridiculous because if it rises from $1000 to $2000, it is STILL paper, so to sell gold OR silver for paper that is losing value is stupid, plus there could be a capital gain ??? far better to exchange you metal for goods/articles, ESPECIALLY being precious metals are in LIMITED SUPPLY.
what is even more daft is ,if gold were to fly to $15000 an ounce???(and pigs could fly? they can,,, its called SWINE FLU, FLEW ,(pigs are called swine) ,
can you imagine taking 1 gram of gold to a jeweller and him giving you $500 for it? or buy a quality second hand car for 10 grams. (maybe goods would not attract tax because it would not be sold in dollars and so no profit to declare and taxes are due on dollars profited, in my opinion)
Hello Mr Mayer, I was reading the posting you made today regarding the currency devaluation in Venezuela, where you wrote the following “…started 2010 off by devaluing the Venezuelan bolivar by 50% from 4.3 per dollar to 2.15 per dollar…” . Did you mean to write the opposite… from 2.15 per dollar to 4.3 per dollar ? In my mind, what you wrote described a currency appreciation, right ? Joe
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Thanks Joe I did juxtapose them. I have made the correction.
Trace
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Thanks for the quick response. I’ve been thinking about
Chavez’ currency devaluation, and I don’t quite have my
mind wrapped around it. I read in another article that
some ‘essentials’ would utilize the 2.15 exchange rate,
and everything else would use the 4.3 exchange rate.
So, if I’m a small business man, importing goods into
Venezuela, (lets say MP3 players), my cost to do so
effectively doubles… I now have to pay the exporter
4.3 bolivars (per US $) instead of the old 2.15 bolivars.
When I sell the player to my local customers, I have
to double my asking price. That part is clear.
What I don’t understand is how this helps Chavez or
his government. I’m assuming their main export is oil.
When they sell their oil in the foreign markets, they
receive US Dollars… the same number of US dollars
whether you look at it before the currency devaluation
or after. So, what’s he up to ? Does it give him the
justification to print a bunch more bolivars ? And if
this was the goal (more bolivars), why not just print
them up as needed (suffering the effects of eventual
inflation), and not officially change the exchange ratio
with the USD ?? I just can’t figure it out. Can you
explain it to me ? I’m sure your other readers would
find a detailed explanation useful also !!
Joe
Was interested in hearing what people think happens to mortages in a hyperinflationary state. Does it get wiped out like your savings…I guess only if your wage goes up with the inflation.
Chris
Yes, Chavez has different rates depending on essentials like food, etc. Overall, it is a mess. Prices have already been trading in the market and actually around 6-7 bolivars to a dollar. So the market is pretty well adjusted. The issue is that prices can’t be raised without the threat of nationalization and Chavez has already done it to a few businesses temporarily.
Chavez and the regime benefit mainly with the national oil company and its debt. They will also get to issue more bolivars so it is a short-term way to access cash but is going to do tremendous long-term damage to the economy. It is going to be harder to import stuff and a $500M deal with Argentina is at risk now.
Yes, it is a way to purge debt from the system. I think a long-term fixed rate mortgage so long as you have the cash to make debt payments and find value with the property in the meantime is probably a pretty good way to play the coming inflation.
Very informative thanks
In what way new supplies of gold around the world will affect the price of the metal in the stock exchange?
Annual worldwide gold production has actually been declining. Decreased supply with static demand means increased price. Decreased supply with increased demand, primarily from investment or central banks, means really increased price. This is what we have seen over the last 10 years.
EN TOTAL, TENIAMOS UNA ECONOMIA ANTES HACE 11 años, y encontrabamos de todo era subsidiada, pero habia, ahora el gran problema es que no hay, y todo es mas caro, por la devaluacion de la moneda, pero lo realmente triste y reocupante que existan todavia ciudaddanos que adoran al que te conte, y no analizan, repiten como loros y aplauden como focas, viva Venezuela mi patria querida oremos para que Dios en su infinita misericordia tenga compasion de mi pais.
Es lamentable cuando las personas de buen grado seguir los estafadores pensando que el pescado que se tiran es lo que son dignos de. Por desgracia, Dios a menudo permite la ley natural siga su curso y Venezuela está tomando un curso muy difícil. Vete mientras puedas.
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