CARACAS: Venezuelan government has negotiated a deal with Citigroup to swap a portion of its gold reserves for $1 billion in cash. The decision has had worldwide implications, with gold surging past $1,200 an ounce, April 27 and stock markets around the world seeing significant changes as a result. The Venezuelan central bank was believed to have provided 1.4 million ounces of gold in exchange for $1 billion. The swap is believed to be a source of needed cash for the government in the wake of a steep drop in oil revenues. Venezuela will reportedly be paying interest on the funds, but experts have pointed out that the nation can buy the gold back in the future and retains their right of first refusal.
Following the news of the deal, gold prices surged above $1,200 an ounce in its best day since January. Several factors are believed to be driving these gold futures to the highest level in weeks, including the expiration of May options and short covering, as the April futures expired Tuesday, April 28, creating a sudden increase of shorts on the market.
However, the Venezuela deal is almost certainly a major cause. Futures for June increase 2.4% to 1,203.20 an ounce, while gold stocks also rallied, with Freeport-McMoran increasing 5% and Newmont Mining rising up almost 3%. Similarly, the Spdr Gold Trust ETF was up 2% in its best day since late January.
Now, experts are trying to determine how long this trend could last on the market: with some analysts theorizing that the deal drew attention to different institutions, many believe that the market may now be able to hold $1,200. Others, meanwhile are hypothesizing that an inevitable wall of selling will trap prices between $1,177 and $1,220. However, many are waiting for the United States Federal Reserve to make a statement, as evidence shows that prices can be more volatile before the organization’s meetings. The People’s Bank of China has already made the decision to buy regional and national securities, to safeguard against inflation already had a huge effect on the market, and strategists say that if the Fed sounds even the smallest bit aggressive, gold could decline and the dollar would rise.
In the end, it seems clear that Venezuela’s decision has made it difficult for even the experts to determine how international stock markets will react. Investors are usually able to judge a stock’s potential by the gross profit ratio, or GPR, which is determined by comparing the earnings per share (ESP) growth to the previous quarter. A certain quarter’s EPS must be 30% higher than the one immediately preceding it to experience an EPS growth of around 30%. The Venezuela agreement, however, was so unusual and to some degree unexpected that it isn’t clear how it will change things over time. Nevertheless, one thing is certain: your stock research subscriptions will likely be talking about this for some time to come.
