Why The Argentinean Situation Should Make You Buy Gold

There hasn’t been anything but bad news coming from Argentina lately as the peso continues to drop against the US Dollar. This leads to an unbearable situation for both the main actors on the political scene as well as the monetary policy makers. But even worse off are the common people.

Let’s start with the beginning, Argentina has always had some prejudices against the country after it had to default on almost $100B of debt in December of 2001. Since then, the international community and investors have always been quite reluctant to ever put money in Argentina again. However, as the next chart shows you, Argentina’s economy was really booming after its depression ended in 2002 (which was a horrible year with a GDP contraction of almost 15% caused by a massive inflation rate of 41%).

Chart 1

As you can see, Argentina’s Gross Domestic Product almost quintupled in just a decade, from just over $100B to in excess of $600B. This would be great, but let’s not forget what caused this boost in the economy. Back in 2009 during the global financial crisis, Argentina’s economy was decreasing again and this made the policy makers panic.

Chart 2

After almost six years of continuous growth, the economic engine of Argentina stalled and seemed ready to crash. What was the solution to keep the economy going? Pumping more liquidity in the system by making more cash available to households and SME’s (does this sound familiar?). Let’s have a look at the chart which depicts the money supply rate (We use the M3 money supply here). In the first chart you can see that from 2007 on there has been an increased money supply, but it’s clearly visible there was a strong acceleration from 2010 on.

Chart 3

In just four years time, the money supply growth almost fourfolded (and we expect to have reached this milestone before the end of this year). So how could consumers protect themselves against a failing monetary policy? Buy purchasing a stronger currency, and in this case the US Dollar was the most interesting currency to purchase. However, as everybody was scrambling to get his (or her) hands on US Dollars, the reserves of the Argentinean Central Bank were depleting very fast, and the country had to instate extremely strict rules on who was allowed to buy US Dollars and how much they were allowed to buy. These new rules were enforced from 2012 on and have recently been fine-tuned, causing further pressure on the Argentinean Peso which has already experienced a huge devaluation ànd depreciation in the past years.

Chart 5

Source: Yahoo Finance

For the record, the previous chart shows the ‘official’ exchange rate which currently stands at approximately 8.5 Argentinean Peso per US Dollar. However, the black market exchange rate is closer to 15 Peso per Dollar, reflecting the eagerness of Argentina’s citizens to get its hands on a safer currency.

And we can hear you think ‘oh, but if it’s that hard to purchase Dollars, why don’t they buy gold and silver instead?’. That would be the logical thought, but back in 2012 the country has already banned all private buying of gold, and the only legal spot to buy gold was one specific bank in Buenos Aires, which marketed a product with a purity less than 99.99% gold. So by the time the hyper-inflation in Argentina started, the common people had no longer the possibility to either buy Dollars nor gold.

And let’s face it. Argentina’s Central Bank wasn’t the only central bank with the printing presses running at full capacity. Have a look at the next chart, which depicts the M2 Money supply in the USA (there are no official M3 numbers available). Even though the growth rate of the money supply is lower than in Argentina, the USA’s M2 money supply has grown by a stunning 36% in just 4 years time.

Chart 6

Granted, the money supply growth rate in the USA is lower than in Argentina, but even a slower growth rate (which is still close to a double-digit annual growth number) will very likely have an impact on the country’s economy. Argentina couldn’t be saved, as it had reached a ‘point of no return’. But these charts show how fast things can evolve and why it’s necessary to keep at least a part of your assets in protective investments like gold.

Just have a look at the 5-year chart of the gold price in ARS. Do you see any major corrections? We don't.

Gold price in ARS (y

As the Argentinean situation evidenced, when the shit really hits the fan, you will very likely have no more access to it!

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