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Monday, November 09, 2009

As Chavez prepares for war, is it time to bet against Colombia?

Chavez I never short the price of gold. I’m a sound money advocate...a gold bug. When gold goes down, I buy more. When gold goes up, I buy more. It’s an investment strategy based on the belief that “[p]aper money eventually returns to its intrinsic value – zero," to quote French philosopher Voltaire.

But news Sunday that President Hugo Chavez has ordered Venezuela's military to prepare for war with Colombia has me rethinking this strategy, at least as far as gold exploration companies in Colombia are concerned.

Under President Alvaro Uribe, Colombia has become a safer place to do business, making the under-explored, resource-rich country the current hot-spot for resource investors.

(Your humble publisher was even a founding director of a junior oil and gas company with assets in Colombia, but circumstances eventually directed our attention to Saskatchewan. The company was appropriately enough named Mises Capital, after the great Austrian economist Ludwig von Mises, although it has since gone through a name change.)

Uribe is doing a lot right in Colombia, but his neighbour to the east is working hard to destabilise the entire continent. In a report by MSNBC, Chavez warned that Venezuela could end up in a war with Colombia that “could extend throughout the whole continent."

At the risk of turning this post into another attack on the failed war on drugs, Chavez is beating the drums of war over what he interprets as US interference and intimidation in the region. By sponsoring Colombia’s war on drugs and the country’s ongoing battle against Marxist insurgents, the US has put Chavez on the defensive. The fiercely anti-American and anti-capitalist Chavez is convinced the US is preparing to invade Venezuela for its oil riches, not an entirely unreasonable position given the 128,000 US troops in Iraq.

Of course, the real motivation for Chavez’s war mongering is likely to draw attention away from the disastrous collectivist domestic polices in his own country. Elsa Cardoso, a professor of international relations at the Central University of Venezuela, told the Associated Press that Chavez is “sending up a smoke screen, a distraction."

Smoke screen or not, investors are likely to cool to Colombia until political tensions subside, which brings me to my reconsidered investment strategy: short Colombian gold explorers.

In the last 52 weeks, Ventana Gold (VEN.TO) has gone from $0.38 to $12.43. The company, exploring in Colombia, has seen a spectacular rise in its share price as the price of gold reaches new highs. I don’t own any shares in this company, nor do I have any unique insight into management – but I can only assume this news will have a negative impact on the share price. Of course, I’m also the worst stock picker since the guy who bought Bre-X Minerals at over $280 a share. By 7:30 AM (Mountain Time), when the markets open, we’ll know if my hunch was right.

(Picture: Venezuelan President Hugo Chavez with Iranian President Mahmoud Ahmadinejad)

Posted by Matthew Johnston

If you think Chavez is a dangerous statist, buy one of these books and support the Western Standard through our Amazon Associates account.

Posted by westernstandard on November 9, 2009 | Permalink


1. "I never short the price of gold. I’m a sound money advocate...a gold bug. When gold goes down, I buy more. When gold goes up, I buy more."

2. "Of course, I’m also the worst stock picker since the guy who bought Bre-X Minerals at over $280 a share."

3. Shorting gold was a good strategy for most of the 20 years between 1980 and 2000: Chart 1. But more recently... Chart 2.

4. If the "intrinsic value" of paper money is zero, then so is the intrinsic value of written contracts. That is, unless you write them like this.

Posted by: Fact Check | 2009-11-09 7:07:17 AM

Over the very long term, gold will hold its value better than cash. You might, however, have to suffer through periods (as FC has pointed out) which may not seem very short ;)

Don't worry about the stock picking, junior mining companies are notoriously bad investments.

Posted by: Charles | 2009-11-09 7:43:03 AM

mmmmm Butter cups are soooo good.....in my bum - GO AGD

Posted by: Chuck Norris | 2009-11-09 8:25:14 AM

Good, good... i wanna see some action in latin america.

Posted by: Tod | 2009-11-09 8:35:46 AM

Ventana is up 6% so far. So much for my career as a day trader. I suppose the political risk is already factored into the price.

This gold rally is something to behold.

Posted by: Matthew Johnston | 2009-11-09 8:40:11 AM

Buying gold is an intelligent alternative to simply hoarding cash, as it won't usually lose value relative to inflation.

If you're doing *better* than inflation it's probably a speculative bubble. Inflation will either catch up, or the price will go down.

Posted by: K Stricker | 2009-11-09 12:09:58 PM

Still think pre-emptive strikes (or pre-emptive assassinations) are a bad idea? What IS it about Latin America that makes it such a haven for banana republics? Even when a country tries to rise above it all, its envious neighbours trip it up and tumble it back into the mire. What a waste.

Of course, Chavez has talked big before. He's acquired a reputation as a man of many words and little action, at least outside of domestic affairs. Even with all his purloined wealth, I can't see him having enough money to finance a war between Venezuela and Colombia, especially since the latter will no doubt have the firm backing of the United States. If America walks away on this one after all the cooperation Colombia has given them, they won't find another ally on that continent for a generation. At least.

Posted by: Shane Matthews | 2009-11-09 2:10:09 PM

P.S. Venezuela would not be NEARLY as hard a nut to crack as Iraq or Afghanistan. Most of the problems in Iraq stem from two rival factions that hate each other, while in Afghanistan the problem is an elusive enemy in remote mountainous regions. Of course, the barrios might rise up once their gravy train sputters to a halt, but since Venezuela is on the verge of collapse anyway it might be an idea to just let that happen first, then step in once the barrios begin to starve.

Cruel and calculating? Yes, but as the politics of the country proves, we're not dealing with people currently of a mind to respond to warm fuzzies.

Posted by: Shane Matthews | 2009-11-09 2:13:41 PM

So if Chavez attacks Colombia in a pre-emptive strike, does the US come to the aid of Colombia? Oh wait, I forgot. Obama is president. That was a silly question on my part.

Posted by: Raging Ranter | 2009-11-09 4:50:42 PM

Like Shane it remains a mystery to me why no Latin American country, with the exception of Costa Rica, has been able to establish a functioning democracy with the rule of law; in other words stability. Most have great natural resources and development potential and most Latin Americans are intelligent people. Yet their fate seems to be to go from police state dictatorship to communist police state dictatorship and back again.

Posted by: Alain | 2009-11-09 6:15:38 PM

I must disagree with Alain. Take Chile: after the departure of Pinochet, it has become a model of democracy for the continent. With rather low poverty and a powerful middle class, the country is considered a success story by the World Bank. Also, despite an endemic crisis a while ago, Argentina is not so bad, too.

Posted by: n00w | 2009-11-09 7:31:50 PM

For being wrong about Chile, or wrong about the target of your abuse, Oog? You just can't stop yourself, can you? Must be your addictive personality.

For the record, Chile, being a Spanish-speaking South American country, is most definitely part of Latin America, which is so named because its people speak languages descended from Latin: Spanish and Portuguese. And the south pole is in Antarctica, which is not a country.

Posted by: Shane Matthews | 2009-11-10 6:26:45 AM

What business is it of Washington to involve itself in Colombia's nearly half-century civil war? Both the civil war and drugs are merely a convenient political subterfuge enabling the Pentagon's insatiable desire to slap down yet another of its pernicious "Lillypads" in a strategic South American locale. If I were the neighbors - Ecuador and Venezuela in particular - I would be worried too! After all, look at Washington's record in the region - not good.

Posted by: LouC | 2009-11-10 1:48:05 PM

Indeed Chile is a Latin American country, and I am aware of the situation there and in Argentina. Both countries have known periods of good government, good development and success, but both have at different times reverted back to what I described. Costa Rica has remained the most stable over the long, and that was the point I wanted to make.

Even Mexico, a North American and Latin American country, suffers from the same. Just about every time Mexico's future seems to be improving and getting brighter, things end up pretty much reverting back. Corruption and abuse of power continues to keep people down, while turning to communism makes it even worse.

Posted by: Alain | 2009-11-10 4:03:29 PM

'Corruption and abuse of power,'

Kinda like George HW Bush/USA invading Panama, killing thousands of Panamanians in 1989 'Just Cause' cause Noriega had the 'goods' on the Bushes?

Cocaine Contra Cowboys.

Do you feel the Rapture?

Posted by: jeff franklin | 2009-11-10 4:31:17 PM

I've added some book links to this post.

Posted by: Matthew Johnston | 2009-11-12 4:28:59 PM

This paper by a Washington research body looks at the real damage done to Venezuela by 10 years of Chavez. The numbers don't lie.


Posted by: jj | 2009-12-27 2:47:32 PM

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