Full disclosure: I love the movie National Treasure, and its Academy Award™– winning star, Nicholas Cage.
To me, it’s like an adult version of Goonies. If it’s on TV, I will compulsively watch it; I put it on sometimes when I’m bored; I quote it way too much for someone in their 40’s.
My wife, an actress herself, is… less than thrilled at this personality quirk.
But I’m not here to talk about the recent Disney+ release of this stupid fun movie delightful piece of cinema.
I’m here to talk about Venezuela.
Mired in economic collapse under the authoritarian thumb of President Nicolas Maduro – and made exponentially worse by a collapse in oil prices – its citizens are unfed and unproductive. And that results in unrest.
Nevertheless, Venezuelan officials persist in grasping at straws to maintain the flow of goods and services – and therefore US Dollars – into the country.
They’ve just simply run out of conventional options with no discernible exports and a currency that’s been inflated into oblivion.
But throughout history, there’s always one option that sovereign nations can turn to in dire straits…
And indeed, Venezuela is turning in that direction, releasing 9 tons of gold (roughly US$500 million) to longtime ally Iran in exchange for the country’s help in rehabilitating Venezuelan refineries.
It makes some sense, too (despite the downturn in gasoline prices), as the prospect of bringing in much-needed US dollars to try and stabilize their currency is a reasonable one. After-all, their feedstock and labor are essentially free at this point.
But it outlines a problem that many emerging markets (and certainly poorer ones) are going to have as the ripples of COVID-19 shutdowns work their way through the supply chain.
These smaller countries will need as much access as they can get to a tight US Dollar market, because that is the preferred medium of exchange for most global finance and trade.
Now, the US has already had the ability to funnel dollars to our larger, more powerful allies (Europe, Great Britain, Japan, Switzerland, and Canada) for decades through what are called swap lines.
And recently, the Federal Reserve opened nine more with other strategic allies in Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand.
So, while those swap lines allow ready access to USD for those 14 nations, that leaves 181 countries to fend for themselves.
And collectively, they have a whole bunch of USD-denominated debt – over US$2 trillion – that requires dollars to service.
Source: Bank of International Settlements, Bloomberg
To get those dollars, those countries can do a few different things.
They can conduct trade… though that is difficult to do during a global lockdown.
They can reach out to the International Monetary Fund, which has set aside US$1 trillion in aid for COVID-19 related damages. Unfortunately, there are lots of countries – even some larger ones – that may not be willing or able to receive funding for a variety of reasons.
They can also sell gold reserves from their Central Bank – mainly this benefits China and Russia, who have both been actively buying gold for the last few years. Russia, in fact, has nearly enough USD stored in gold (~US$125B) to offset its USD-denominated debt (~US$145B).
Source: Central Banks, ICE, IMF, World Gold Council
China does not. However, China is also the world’s largest gold producer, and as a Communist nation, it could simply purchase domestic mining supply in its local currency, and exchange it on the market for USD in a pinch.
The worrisome part about this idea is that other, smaller countries who won’t be eligible for IMF access may get the same idea if they have any domestic gold mines.
In fact, we’re already beginning to see that, as Papua New Guinea threatened to nationalize Barrick Gold’s Porgera mine just a few days ago.
Actions like this could have dire consequences for producers as the USD-funded world gets divided into “haves” and “have nots”.
My colleague Marin Katusa is calling this “The War On Gold”, and the research he’s done on this subject is extensive and thorough.
In particular, he’s outlined exactly which producers and other companies are most at risk from this dynamic, and how he thinks investors should prepare for the coming uptick in demand.
I encourage you to go read his research here…
Now, this particular exchange between Venezuela and Iran isn’t likely the sole reason for the recent sell-off in gold prices.
But that said, we should definitely take advantage here by deploying another ¼ stake in Velocityshares 3x Long Gold ETN (NASDAQ: UGLD).
Because at the end of the day, the whole point of learning these things is to try and build our own National Treasure.
Have a great weekend, everyone.
All the best,