Argentines Flee to Gold on Financial Repression, Devaluation

Escalating financial repression implemented by the Argentina government has been prompting its citizenry to seek gold as safehaven. 

From the International Business Times:

Argentines are utilizing gold to hedge their savings as economists forecast the peso will lose more value than any currency in the world, and President Cristina Fernandez de Kirchner forbids dollar purchases.

The nation’s inflation rate of 26% is also eroding Argentina’s peso- denominated bonds to fall 5.5% ytd.

With Argentina printing pesos to finance itself, the growth of pesos in the economy has rose 38% in the past year, leading analysts to predict that the currency will depreciate 12.9% through year-end, the highest of currencies tracked by Bloomberg.

Banco Ciudad is the only bank left that trades in gold after Fernandez  banned the purchase of certified 99.99% pure gold for savings in July. The bank sells it at 99.96% purity, according to Carlos Leiza, who oversees the lender’s gold trading.

There is a 35% gap in the prices to buy and sell physical gold at Banco Ciudad, while there’s no premium to sell the country’s benchmark 2017 dollar bond in the local market, according to the Buenos Aires-based Open Electronic Market, known as MAE.

Gold sold by Banco Ciudad also isn’t recognized internationally, making it more difficult to determine its value, he said.

Watch Bloomberg’s news video on this here

I must say that Argentina’s inflation rate must have been severely understated by the mainstream. Price controls have been distorting real conditions in Argentina. The Argentine government even recently banned advertising as part of price controls.  Official inflation rates are way below private estimates. Argentina’s government has also been censoring private sector economists from making inflation forecasts.

Argentina’s “blue dollar” or the nickname for the US dollar based on the black market rate has fallen to a new low yesterday, at 8.27 from 8.07 last Monday or a decline of about 2.4% in just a few days. The Peso is far from the official rate of about 5.1. The gap between the black market rate and the official rate continues to widen.

The increasingly desperate government has imposed more capital controls through a 15% tax hike on the use of credit cards abroad aside from new 20% levy on airline tickets.

Unlike Venezuela, so far, Argentina’s stock market has yet to manifest symptoms of hyperinflation. The Merval index has been up 22.23% year to date, as of Friday’s close, and nears a milestone breakout.

We should not confuse rising stock markets with prosperity or even bubble cycles, when they serve as evidence of worsening monetary disorder. Nonetheless a breakout of the Merval along with increased panic buying on gold will could mean a tipping point towards hyperinflation and a crisis.