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February 8, 2012 The WealthCycles Staff

Just like that, boom, devaluation happens, the snap decision of a desperate government with socialist desires to just give and give and give—but first it must take.

Venezuela just devalued its currency, the bolivar, by 46.69%.

If you as a Venezuelan had $10,000 held in bolivars earlier today, it is too late to buy gold and silver to protect from this loss; you now have less than $5,400 in purchasing power this afternoon. If you stored or saved your hard-earned wealth in silver or gold, congratulations: you have preserved 100% of your wealth; and it could even be said your wealth went up 46% in bolivar terms.

Venezuela Bolivar vs Dollar 2002

Japan has promised to print big quantities of yen, an even bigger printing push than the Federal Reserve’s program of $85 billion dollars printed monthly, but Japan said it would do it… in 2014. The Bank of Japan has consistently expanded monetary policy “in drips and drabs” and has not impressed upon the market its determination to weaken the yen. It takes quite a bit of printing to effect a significant depreciation in exchange rates. As these two legacy, debt laden economies—Japan and the U.S.—duke it over which can implement the weakest policies, Venezuela has brought “a nuclear bomb into a currency war knife fight,” as Zerohedge writes.

We remind readers that the U.S. devalued by 70% overnight in 1934, and including the ongoing expansion of dollars, has lost 99.98% of the original $20 bill, then equivalent to 1 ounce of gold.

When looking at stock market performance, one needs to take into account the loss in the value, or purchasing power, of the currency in which the shares are denominated.

As printing picks up pace in local currencies around the world, and with sudden devaluation of some currencies looming over the unknown horizon, we encourage readers to remember that stock markets historically do extremely poorly in real terms during an environment of inflation. That is because companies are forced struggle to maintain a profit, squeezed between briskly rising input costs and the necessary but reluctant hikes in sale prices.

The thing is, in today’s impending inflation environment, the stock markets appear to be performing quite well, and show the best nominal returns. But as Kyle Bass pointed out on CNBC on February 1, “Zimbabwe’s stock market was the best performer this decade—but your entire portfolio now buys you three eggs.”


100 Million Zimbabwe Dollars 3 eggs


And in Argentina, stocks look great in pesos. Bottom pane shows the market in dollars:


But of course, dollars purchase less and less every day. If you heard on the financial comedy networks as of recent that Japanese stocks have gotten “a little pop,” again, better check the bottom pane—nope, Japanese stocks have not gone anywhere, and sit at 1983 levels in real terms.


So we prefer to measure value in gold. Here is the Dow Jones Industrial Average from before the great financial crisis, to date, in both dollars (nominal) and in gold (real):

Dow Jones Industrial Average DOW Gold


In the Venezuelan black market, the bolivar is trading at 18.4 to the dollar, versus the official exchange rate, lowered from 4.3 to 6.3 to the dollar today. Annual price inflation, the purchasing power lost in one year, was 20% for 2012 and 28% in 2011. Venezuelan stocks are just ebullient:

Venezeulan Stock Market VEF

Around the world, it will be the same: fiat paper currencies losing value as their supply is increased, whether by dilution or snap devaluation. Real assets such as stocks respond, but only in terms of the devalued currencies. We have written previously about Currency Dilution and Devaluation in the Modern Day, referencing the 2011 Belarus devaluation of 56.3%. In real terms the only way to protect yourself is by not participating in the financial system, but rather by saving in real money—gold and silver.

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