Currencies Can Evaporate, But Not Silver or Gold

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 |  Includes: GLD, SLV
by: Trace Mayer

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 Good Will 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.