The bad news coming out of Venezuela just keeps getting worse. Over a year into its hyperinflationary crisis, the Venezuelan regime is clinging to anything it can to keep itself afloat. First the regime tried to create a new cryptocurrency, the petro, backed by the country’s oil reserves. Then it announced a redenomination of the bolivar, chopping three zeros off the currency. And now it appears that Venezuela is once again dipping into its gold reserves to pay its bills, driving reserves ever lower. If the government continues at this pace, it could run out of gold within a year.
Venezuela famously repatriated its gold reserves from the New York Fed in 2011. It was a show of independence, demonstrating that Venezuela wasn’t going to allow itself to remain beholden to the United States. But rather than maintaining Venezuela’s independence, Venezuela’s gold holdings have been used by a government that is more dependent than ever on its foreign creditors.
After nearly two decades of crippling socialist economic policies, Venezuela’s economy is in shambles. Its industrial production was allowed to deteriorate to the point that oil made up over 95% of the country’s exports. And with corruption and mismanagement rife at the government-owned oil company PDVSA, even the production of oil has gradually decreased as poorly-maintained equipment cannot continue to produce.
A country that produces less and less for export has less and less money to purchase imports, which combined with a hyperinflated currency and price controls has led to major shortages of food, medicine, and even toilet paper. The Venezuelan government has even had difficulty paying the European printing companies that have printed its currency, that’s how badly the hyperinflationary crisis has affected things. And that’s probably why the government has fallen back on its gold reserves in order to keep itself afloat.
It’s now a race to see whether Venezuela’s gold reserves run out before the hyperinflation ends. The longest hyperinflation in modern times was in Yugoslavia in the early 1990s, lasting about two years. Since Venezuela’s hyperinflation has been going on for almost a year and a half now, there’s probably not much more room left to run. Increasing public dissatisfaction, and unrest among the military, will probably signal the downfall of the Maduro regime. But if Maduro manages to hold on for longer than expected, he could exhaust the country’s by now meager gold reserves and bleed the country dry.