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Schork: How You Know Top in Gold Is Near

Friday, 19 Aug 2011 | 12:38 PM ET

According to various newswire reports, Venezuelan President Hugo Chavez plans to nationalize his country’s gold mining industry and repatriate 211 tons in gold reserves from North American and European banks. At last night’s settlement in December gold on the Comex, $1,822/ozt, Venezuela currently has $11.2 billion of reserves in the vaults in banks abroad.

Given how Chavez has butchered his country’s oil cow since coming into office (February 1999), it is not unreasonable to suggest he will do the same with Venezuela’s gold reserves.

According to the CIA World Factbook, oil revenues, account for roughly 95% of Venezuela’s export earnings, about 55% of the federal budget revenues, and around 30% of GDP.

The year prior to Chavez taking office, IPE/ICE Brent crude oil averaged $13/b. Over Chavez’ term in office to date, Brent has averaged $54/b; it has averaged $80 since 2006.

Yet, despite this bonanza, the Venezuelan economy suffers. The country’s economy contracted by 1.9% last year. In other words, Chavez squandered the opportunity of a lifetime.

The Friday Trade: Oil
Investing in safe haven plays in this volatile market, with Stephen Schork, The Schork Report and Boris Schlossberg, GFT Forex.

To this effect, he now faces a tough reelection bid in December 2012. Under this scenario, it is not hard to imagine him raiding Venezuela’s gold reserves, similar to what he has done with the country’s oil wealth, in order to buy votes.

Bottom line, Chavez has the un-Midas touch, anything he puts his hands on, turns to lead.

On this note, gold jumped to a 22:1 ratio to Nymex oil last night. As discussed in The Schork Report, the historical relationship is closer to 15:1.

Thus, should oil revert to gold, than at $1,800/ozt gold we are talking about $120/b oil. On the other hand, at $80/b oil we could be talking about $1,200/ozt gold!

With Chavez positioning himself to unload some of Venezuela’s reserves onto the market, we are growing skeptical of gold’s staying power, and therefore, the metal’s ability to pull oil higher.

As such, the market is scared and therefore The Schork Report is advising clients that we have little interest in being long right now.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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