Venezuela Pawns Its Gold: Stocks to Watch for on Price Surge

finance.yahoo.com

After recent weakness, gold enjoyed a bullish stint on Monday, witnessing its biggest one day rise to over $1,200 an ounce since January. This upsurge was triggered by the news that Venezuela has inked a deal with Citigroup Inc. C to pawn its gold in a bid to mitigate soaring inflation, shrinking economy and depressed oil prices.

For over a month, Citigroup and Venezuela have been negotiating a gold swap deal. Per the deal, the Venezuelan bank would provide 1.4 million troy ounces of gold in exchange for cash. After four years, it would have right of first refusal to buy the gold back. During this tenure, the Venezuelan central bank would be paying interest to Citibank on the borrowed money.

What the Deal Means for Venezuela?

Venezuela’s economy is currently reeling under the pressure of falling oil prices. A founding member of OPEC, Venezuela has been one of the world’s leading exporters of oil since it was discovered in the country in early 20th century. At present, the nation is significantly dependent on oil as it accounts for 95% of export earnings.

The most striking sign of the country’s financial crisis is its rapidly weakening currency, Bolivar, which is caught in a downward spiral. The IMF recently slashed its forecast for the country’s economy to a 7% decline in GDP on top of an estimated 4% fall last year.

Gold accounts for about 71% of Venezuela’s foreign reserves, according to the World Gold Council. The move to liquidate gold would provide much needed cash to the Nicolas Maduro government to meet its internal and external commitments.

What’s in Store for Citigroup?

Citigroup benefitted from the deal as the gold was swapped at a lower price and stands to gain further if Venezuela is forced to buy back its gold at a higher price later. Lower the gold price, the more ounces of gold Citigroup gets in exchange for the amount loaned to Venezuela. Hence, it’s a win-win situation for Citigroup as it will be earning interest income from the loan plus the price appreciation on its gold holdings.

What Does It Mean for Investors?

The gold swap is perceivably extremely bullish for the yellow metal and has been attracting much needed investor interest to the marketplace. This is a great opportunity for investors to accumulate gold and invest in gold stocks. Investors looking for higher leverage to the gold price may want to consider these stocks which surged along with gold prices yesterday.