The Venezuelan economic crisis is worsening. What does it mean for the gold market?
The crisis in Venezuela is probably the most modern illustration that socialism does not work. At the very beginning it seemed that it might work, but it was only a temporary illusion created by high oil prices. When they collapsed, the horrific consequences of socialistic policies became clear, as the country’s economy began to shrink. Following Chavez’s death in 2013, the country fell into an even greater recession, suffering from massive shortages, including food scarcity, lootings, blackouts and hyperinflation. In 2015, the inflation rate was over 100 percent, while this year it is expected to reach 700 percent. And according to the IMF, the GDP will contract 10 percent! The sad truth is that the country has the worst inflation and growth performance in the world, just because it did not learn the lesson from economic history that socialism does not work. To illustrate its misery, we can note that the country sits on the world’s largest oil reserves, but experiences power generation problems. As the economic situation continues to deteriorate, Venezuela will likely default this or next year.
The economic chaos was positive for gold priced in the Venezuelan bolivar. As one can see in the chart below, the price of gold in the local currency surged this year, confirming its traditional role as a safe-haven against hyperinflation, devaluations and economic turmoil.
Chart 1: The price of gold in Venezuelan bolivars over the last 5 years.
Interestingly, gold served as a safe-haven also for the state, which has been selling its gold reserves to raise funds in order to repay debts. The reserves decreased about a third over the past year and plunged to the lowest level on record in the first quarter of 2016.
However, the crisis in Venezuela would not rather affect the U.S. dollar-denominated gold prices, as it is not a systematically important country with strong ties to the U.S. economy. And the economic turmoil is hardly surprising, at least for anyone who took an elementary course in economics.
To sum up, the economic crisis in Venezuela confirms the safe-haven role of gold. However, investors and traders should not expect that it will boost the yellow metal priced in the greenback, as the international price of gold is mainly a bet against the U.S. economy, not other economies.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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