Wednesday, August 24, 2011

Okay, The Gold Investors Win This Round

The basics of investing in commodities revolves around scarcity: the less of something there is to go around, the higher the price, and vice versa.

Over the course of the current... well, what can only be described as a gold rush, really... this hasn't really come up, at least not directly. The price of gold has gone up not so much because people think there's less gold to go around, but because there's less money to go around and gold is at least a stable thing.

Well, now there's less gold to go around. Hugo Chavez, president of Venezuela, intends to nationalize the Venezuelan gold industry, plans announced last week and formalized Tuesday. Not only that, he's making efforts to transfer physical gold reserves to Venezuela; that amounts to an estimated 16,190 gold bars.

That amounts to 211 tons, which is estimated to take about 40 shipments and take a huge amount of effort to physically transport.

The decree is being called almost identical to a law passed in 1965 that nationalized gold mining, and a 1977 law giving the government exclusive rights to extract it. There is no word, however, on whether either of these laws said anything about Venezuela importing gold reserves from overseas, as is now in the works.

According to Chavez's administration, this is being done to get the gold out of countries with unstable economies- namely, European ones. According to local opposition, though, this is being done primarily to shore up a campaign warchest. Chavez faces re-election in 2012. One opposition legislator, Leomagno Flores, said on the floor of parliament, "They are greedy for money for the campaign and want to bring the gold to Venezuela to turn it into cash ... please, this is heresy." Another, Miguel Angel Rodriguez, told Chavez' finance minister, "You will liquidate the gold and sell it because the only thing you know is how to rob, to rob and to rob!"

If Chavez was hoping to keep his own economy stable on the news, it didn't work. Standard & Poor downgraded Venezuela's credit rating on Friday. If you follow credit ratings, it was dropped from BB- to B+. If you don't, it was dropped from the 13th-highest ranking to the 14th, with anything below rank 10 for any of the three major credit agencies being a junk bond. Moody's has them at rank 15; Fitch at rank 14.

Perhaps some gold will assuage their fears.

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