U.S. Sanctions Inadvertently Enable Gold Sell-off

Venezuela is being hit economically from all sides.

From their enemies

The day after Obama announced the eventual normalization of Cuba-US relations, he quietly signed into law a round of sanctions to freeze the assets of a select group of Venezuelan leaders.

The U.S. moves towards both Cuba and Venezuela are, of course, couched in a deep concern for human rights, but unfortunately, the hostile act of imposing sanctions is only providing an excuse for Venezuelan president Nicolas Maduro to further entrench himself and grab more power.

Maduro has been able to paint the United States as an imperialist bully that is about to invade Venezuela at any moment. The unpopular president is using this opportunity to distract his people from the bread lines and shortages and unify them against us, the big “yankee bully” in the north. Unfortunately, if there were human rights violations to be concerned about (likely) this just garnered more sympathy and solidarity for the perpetrators from the Venezuelan people, not less.

Maduro is doing his best to scare the dickens out of his people and get them to unite with him. And actually, these sanctions could not have come at a better time for him.

From their “friends”

Key OPEC ally and friend, Saudi Arabia refuses to cut oil production to allow prices to recover. With oil prices in the toilet, the Venezuelan economy is struggling more than ever. The government is truly in a desperate situation with debt payments coming due, spending to be done and coffers running dry. Saudi Arabia may be able to weather low oil prices for an extended period of time, but Venezuela cannot last much longer. Their economy was struggling under socialism and corruption to begin with.

Maduro has been wanting to sell off part of the country’s gold reserves for cash for a long time to deal with the country’s problems, and last week, he finally did it, causing gold to surge above $1200. This is a penny-wise, pound-foolish maneuver for Venezuela to be sure. It was difficult to get others in leadership to accept this action. However, the US sanctions gave him perfect cover to demand emergency powers to rule by decree through an “Enabling Law.” These emergency powers allowed him to side-step critics and swap 1.4 million ounces of gold for $1 billion cash from Citigroup. Cash crunch solved (for now) and the US can be successfully blamed for any fallout.

Ironically, our government’s sanctions may have actually given a bad president political cover to grab more power and keep a hostile government afloat.

Regardless of the moral standing of the Venezuelan president, situations like these demonstrate exactly why countries, and smart investors, hold physical gold. When financial situations turn grim, you can always fall back on your gold. That’s true for central banks and it could be just as true for you. Are you prepared?