Colombia at Risk of Electing Its First Socialist President

French voters head to the polls this weekend to decide between incumbent president Emmanuel Macron and far-right candidate Marine Le Pen, but the election investors should be keeping their eye on is happening next month in Colombia.

On May 29, the South American country could elect its very first leftist president should Gustavo Petro receive a majority of the vote. (A runoff election could determine the final winner.) The former congressman and mayor of the capital city of Bogotá, Petro is an unabashed admirer of U.S. senator Bernie Sanders, a self-proclaimed “democratic socialist,” and Hugo Chávez, the hardline socialist president of Venezuela from 1999 to 2013, when he died of cancer. 

The two were close friends, in fact, and Petro reportedly attended Chávez’s funeral. But the alarming similarities don’t end there.

Chávez and Petro, Cut from the Same Cloth

Before entering politics, both Chávez and Petro were members of militant rebel groups. As a candidate, Chávez vowed to end the expansion of Venezuela’s oil sector, despite it sitting on the world’s largest proven reserves. Petro, 61, similarly has promised to take an adversarial stance against the mining industry, saying in 2018 that companies involved in oil and gas “will not find a friendly government” if he becomes president.

This would devastate Colombia’s economy. Crude oil represents about half of its total exports and around 10% of its national income. That revenue could disappear overnight, with no replacement to pick up the slack.

It’s hard to imagine now, but at the time of Chávez’s election 23 years ago, Venezuela was the world’s fifth largest crude producer and the top exporter of oil products to the U.S. Today, under the Nicolás Maduro regime, its oil industry is practically nonexistent. In January, the country produced an estimated 668,000 barrels per day (bpd), a far cry from the 3.5 million bpd it regularly produced in 1998.

You can see the tragic results below. Facing worsening violence, hyperinflation and a poverty rate as high as 96%, some 4.5 million Venezuelans fled their country between 2015 and 2019, making them the world’s second largest refugee population at the time after Syrians. Approximately half of these freedom-seekers poured into neighboring Colombia, where about 4% of the population is now Venezuelan-born, up from close to 0% just a few years earlier.

Venezuelan Population in Coloumbia Has Surged Since Maduro Took Power

A Wolf in Sheep’s Clothing

As former U.K. prime minister Margaret Thatcher once quipped: “The trouble with socialism is that eventually you run out of other people’s money.” Venezuelans have learned this lesson the hard way, and it troubles me that voters in Colombia, who have witnessed the influx of refugees fleeing poverty, might now elect a man who would institute the very policies that lead to such poverty.

Investors are understandably worried, and Petro’s advisers have been in damage control trying to ease their concerns. Earlier this month, the candidate signed a document stating he wouldn’t nationalize property if elected, but as many have pointed out, the document is not legally binding. It’s strictly political theater.

The same goes for Petro’s suggestion that Colombia could mine Bitcoin using waterfalls. Bitcoin is private property, something for which Petro, a socialist, has not shown much respect.

Bitcoin and Gold Are Incredibly Undervalued

I hope Colombian voters make the right choice next month, especially since authoritarianism is steadily making gains worldwide. According to Freedom House, nearly 40% of the global population now live in countries without basic freedoms, including financial freedoms. That’s the highest proportion since 1997.

It’s these people who could benefit the most from Bitcoin, I believe. As an open-source, decentralized digital asset, Bitcoin transcends borders and can bypass even the most restrictive currency controls, allowing peer-to-peer remittances to be made.

For this reason and more, Venezuela has among the highest “crypto” adoption rates, with some 3 million people, or 10.3% of the population, holding unspecified cryptocurrencies, according to CoinMarketCap. Other emerging countries with elevated inflation, including Sudan, Lebanon, Syria and Turkey, also report having comparatively high levels of crypto adoption.

Forty percent of the world’s population is about 3.2 billion people; meanwhile, the 19 millionth bitcoin was mined earlier this month. If you do the math, that comes out to one bitcoin per 170 people living in repressive regimes. Having said that, I believe Bitcoin is incredibly undervalued at $40,000.

I also believe gold is undervalued at $1,900 an ounce. You can see the precious metal’s true value when you price it in a currency that’s seen astronomical inflation, including the Turkish lira. Had someone in Turkey bought gold one year ago, they would have seen it double in value as of today. Citizens of Colombia who fear a Petro presidency might want to consider picking up some gold coins or 24 karat gold jewelry.

Gold Price in the Turkish Lira Has Doubled in the Past 12 Months

Gold Coins Sales Had Their Best Quarter Since 1999

Gold had a solid first quarter for many of the same reasons as Bitcoin, namely, high inflation and geopolitical risk. The metal’s price rose 8% in the first three months of the year, its best quarter since the second quarter of 2020, and inflows into gold-backed ETFs totaled $17 billion, according to the World Gold Council (WGC).

U.S. investors appeared to be most interested in physical gold, however. The U.S. Mint recorded the second highest first-quarter sales of gold American Eagle coins on record, following 1999’s first-quarter sales. When combined with American Buffalo coins, which were introduced in 2006, sales still came in second place.

Demand for U.S. mint Gold Coins in the First Quartwesr of 2022 Was Highest SInce 1999

As always, I recommend a 10% weighting in gold, with 5% in physical gold and 5% in high-quality gold mining stocks and ETFs. I believe a 1% to 2% weighting in Bitcoin and Ether also makes sense.

For more on Bitcoin and Ether, watch the replay of my panel on crypto mining at the Bitcoin 2022 conference by clicking here!

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 1.86%. The S&P 500 Stock Index fell 2.63%, while the Nasdaq Composite fell 3.83%. The Russell 2000 small capitalization index lost 3.22% this week.
  • The Hang Seng Composite lost 4.51% this week; while Taiwan was down 6.55% and the KOSPI fell 9.16%.
  • The 10-year Treasury bond yield rose 7 basis points to 2.44%.

………….

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Millennium Sapphire, rising 821.88%.
  • Coinbase’s marketplace for non-fungible tokens (NFTs) is finally here in what could be key to reviving the crypto exchange’s growth prospects a year after its fizzling public debut, writes Bloomberg. A trial version of its long-awaited marketplace, designed to sell ownership of digital art and possibly other items, was unveiled on Wednesday in the company’s latest attempt to diversify its revenue and bring more predictability to the business. 
  • Despite the recent bearish market, Cardano (ADA) seems undeterred and continues showing signs of activity, writes CoinQuora. This dip might be a perfect opportunity to buy ADA before its market price eventually rises. There are several types of activities that show Cardano’s resilience and persistence despite the cryptocurrency market dipping.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Movei Coin, down 99.97%.
  • According to a Bloomberg article, Bitcoin looks soft in the era of hard assets to hedge inflation. A 50-day correlation coefficient for Bitcoin and gold is around minus 0.4, the lowest since 2018. So while demand for portfolio buffers against price pressures catalyzed commodity performance this year, Bitcoin has gone the other way, leaving backers of its store-of-value narrative with a tougher story to sell.
Correlation Between Bitcoin and Gold is tHe Most Negative SInce 2018
  • The announcement of a flat 30% tax on income from cryptocurrencies and other virtual digital assets in Union Budget 2022 seems to have negatively affected Indian retail investors’ interest in crypto, search data from Google Trends over the past 90 days suggest. Searches for the term “cryptocurrency” were at all-time highs in the past 90 days on February 1, the Budget Day, with a reading of 100. Since then, readings have been in the range of 17-9 on most days.

Opportunities

  • The New York Liberty announced that it would become the first team in Women’s National Basketball Association (WNBA) history to drop NFTs in the form of digital art. The release of the NFT will be on May 7 to coincide with the Liberty’s season opener against the Connecticut Sun, writes Bloomberg. 
  • Rapper Snoop Dogg collaborated with metaverse platform Mobland to bring digital weed farms to the metaverse, according to Bloomberg. The platform will host branded digital weed farms in the form of NFTs and exclusive content from Snoop’s son Champ Medici. 
  • Cryptocurrency traders are currently “itching” for a Cardano price rally, as their sentiment towards the asset is now at a high that hasn’t been seen since mid-November, when ADA was trading near the $2 mark. 

Threats

  • Decentralized finance project Beanstalk Farms suffered one of the largest-ever flash loan exploits on Sunday, sending the price tumbling, writes Bloomberg. The credit-focused Ethereum-based stablecoin protocol suffered a total loss of around $182 million, and the attacker got away with around $80 million of crypto tokens. It isn’t clear yet whether investors who lost funds will be reimbursed or if so to what extent.
  • Countries such as Russia and Iran may eventually use cryptocurrency mining to evade sanctions, the International Monetary Fund (IMF) warned in a report. There’s a risk that sanctioned nations will leverage their energy resources to power mining, said the IMF. By expanding their mining operations, governments could also generate revenue directly from transaction fees, reported Bloomberg. 
  • The U.S Treasury Department imposed sanctions on crypto mining company BitRiver, targeting one of the industry’s largest data center service providers over its operations in Russia in its first such action, writes Bloomberg. The Switzerland-based firm offers energy sources, mining facilities and large-scale management solutions to Bitcoin miners across the world, including those in Eastern European and Russia.

Gold Market

Gold futures closed the week at $1,934.40, down $40.50 per ounce, or 2.05%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended lower by 8.75%. The S&P/TSX Venture Index came in off 6.26%. The U.S. Trade-Weighted Dollar rose 0.79%.

Date Event Survey Actual Prior
Apr-17 China Retail Sales YoY -3.0% -3.5% 1.7%
Apr-19 House Start 1,740k 1,793k 1,788k
Apr-21 Eurozone CPI YoY 3.0% 2.9% 3.0%
Apr-21 Initial Jobless Claims 180k 184k 186k
Apr-26 Durable Goods Orders 1.0% -2.1%
Apr-26 Conf. Board Consumer Confidence 107.5 107.2
Apr-26 New Homes Sales 774k 772k
Apr-28 Hong Kong Exports YoY 0.9%
Apr-28 Germany CPI YoY 7.2% 7.3%
Apr-28 US GDP Annualized QoQ 1.0% 6.9%
Apr-28 Initial Jobless Claims 180k 184k
Apr-29 Eurozone CPI YoY 3.1% 2.9%
Apr-29 Caixin China PMI Mfg 47.0 48.1
Gold Has Held Up Well EVen As Real Yewilds Turned Positive Again

Strengths

  • The best performing precious metal for the week was palladium, up 0.49% despite hedge funds raising their net short position to a 12-week high.
  • Yamana Gold, which operates mines in four countries including Canada and Argentina, is seeking better terms from lenders including Bank of Nova Scotia and Citigroup Inc. after earning an upgrade from S&P Global Ratings. “We’ll definitely make sure it is being respected and acknowledged in all of our lending facilities,” Chief Financial Officer Jason Leblanc said in an interview. “We have ongoing discussions with them.”
  • De Beers signed two mineral investment contracts with the government of Angola for license areas in northeastern Angola, according to a statement. The contracts are for the award and exercise of mineral rights covering all stages of diamond resource development and span a period of 35 years.

Weaknesses

  • The worst performing precious metal for the week was platinum, down 7.02% with hedge fund managers flipping from net short to net long the metal with prices dropping. Gold slipped the most in three weeks as U.S. Treasury yields surged following stronger-than-expected U.S. housing data. New U.S. home construction rose unexpectedly in March to the highest level since 2006, boosted by multifamily projects as builders seek to replenish housing inventory.
  • Diamond buyers across Dubai and Antwerp and processing centers for finished diamond in India are trying to understand how U.S. with war sanctions on Alrosa PJSC, the world’s biggest diamond miner, is going to affect trade in the gemstone market. Tiffany and Signet Jewelers have publicly stated they will stop buying diamonds mined in Russia. However, retailers in China, India and the Middle East are still open to purchases.
  • Iamgold is down about 8%, on pace for its biggest decline since July, after BMO’s Jackie Przybylowski cut her recommendation on the miner to “market perform” from “outperform.” While the downgrade is primarily due to an elevated valuation, the analyst also expects a review of the Cote Gold project in Canada expected later this quarter to be negative, according to a note out premarket on Monday. BMO estimates nearly $2 billion in project spending for the project and sees a risk that the budget could increase more and/or the startup timeline could slip beyond early 2024.

Opportunities

  • Gold is proving remarkably resilient, gaining almost 7% this year as investors shrug off surging real yields and strengthening dollar to focus on political and economic risks. While traditional yield and currency drivers suggest bullion is overvalued, demand for the haven asset remains strong. That’s because gold buyers piling into exchange-traded funds (ETFs) are taking a pessimistic view of the U.S. Federal Reserve’s ability to cool decades-high inflation without hurting the economy. For them, gold is a hedge against soaring prices and low growth.
  • According to Credit Suisse, investors are more constructive on gold, despite still expecting higher interest rates. This is because of expectations of sticky high inflation, and the potential for Fed policy. A conservative approach by the Fed could lead to protracted high inflation, while an aggressive approach could cause a recession; either scenario would be positive for gold. Credit Suisse, assuming gold prices stay flat, also believes producers will be generating more free cash flow in the second half of 2022, at which point there may be announcements of higher dividends. Energy prices have increased significantly. Therefore, updated commentary on cost sensitivities at different oil prices, diesel hedges and the potential for overall cost per ounce to be at the high end/above guidance. As a reminder, energy is typically 5% to 10% of cash costs for gold miners.
  • Bank of America reiterated its bullish view on gold from February and sees prices advancing to $2,175 per ounce, according to technical strategist Paul Ciana. That is a 9.9% jump from Monday’s closing price and would be a new all-time high. “We think the daily, weekly and monthly timeframes still indicate higher gold prices this year,” Ciana says in a note.

Threats

  • Fed Chair Jerome Powell outlined his most aggressive approach to lowering inflation by letting the market know that a 50 basis point hike in its benchmark rate is on the table for next week’s meeting. Not to be outdone, Fed colleague James Bullard opened the door further with potentially debating a 75 bp increase to tame inflation. Obviously, the Fed is showing concern and yields have now surged such that a full 200 bp is factored in prices now, marking four raises of 50 bp. The last time the Fed raised rates by 50 bp was in May 2000.
  • According to Raymond James, the first quarter of 2022 is expected to be one of the weaker operating quarters of the year for several producers for a variety of factors, ranging from weather and pandemic issues impacting mining operations, expected mine sequencing of lower grade and ramp ups at various sites expected to benefit production later in the year.
  • Dickie Hodges of Nomura Asset Management is calling a top for inflation expectations that he believes on both sides of the Atlantic are starting to be overdone. The Nomura Global Dynamic Bond Fund has entered into swaps that stand to gain in value is market gauges of inflation fall over the next 10 years. He thinks bottlenecks in the supply chain will sort themselves out, but the European economy may go into recession from the fallout of the Russian invasion of Ukraine. Dickie rates in the top 2% of performance among its peer group over the last five years.

Read full article at https://www.usfunds.com/resource/colombia-at-risk-of-electing-its-first-socialist-president/

 

Author: Frank Holmes
Date Posted: April 22, 2022