Frank Talk

A Socialist Takeover of Colombia Would Devastate Its Economy

Author: Frank Holmes
Date Posted: April 25, 2022 Read time: 7 min

France’s Emmanuel Macron comfortably won another five-year term as president this past weekend against far-right candidate Marine Le Pen, but the election investors should be keeping their eye on is happening next month in Colombia.

On May 29, the South American country could elect its very first leftist president should Gustavo Petro receive a majority of the vote. (A runoff election could determine the final winner.) The former congressman and mayor of the capital city of Bogotá, Petro is an unabashed admirer of U.S. senator Bernie Sanders, a self-proclaimed “democratic socialist,” and Hugo Chávez, the hardline socialist president of Venezuela from 1999 to 2013, when he died of cancer.

The two South American leaders were close friends, in fact, and Petro reportedly attended Chávez’s funeral. But the alarming similarities don’t end there.

Chávez and Petro, Cut from the Same Cloth

Before entering politics, both Chávez and Petro were members of militant rebel groups. As a candidate, Chávez vowed to end the expansion of Venezuela’s oil sector, despite it sitting on the world’s largest proven reserves. Petro, 61, similarly has promised to take an adversarial stance against the mining industry, saying in 2018 that companies involved in oil and gas “will not find a friendly government” if he becomes president.

This would devastate Colombia’s economy. Crude oil represents about half of its total exports and around 10% of its national income. That revenue could disappear overnight, with no replacement to pick up the slack.

It’s hard to imagine now, but at the time of Chávez’s election 23 years ago, Venezuela was the world’s fifth largest crude producer and the top exporter of petroleum products to the U.S. Today, under the Nicolás Maduro regime, its oil industry is practically nonexistent. In January, the country produced an estimated 668,000 barrels per day (bpd), a far cry from the 3.5 million bpd it regularly produced in 1998.

You can see the tragic results below. Facing worsening violence, hyperinflation and a poverty rate as high as 96%, some 4.5 million Venezuelans fled their country between 2015 and 2019, making them the world’s second largest refugee population at the time after Syrians. Approximately half of these freedom-seekers poured into neighboring Colombia, where about 4% of the population is now Venezuelan-born, up from close to 0% just a few years earlier.Venezuelan Population in Coloumbia Has Surged Since Maduro Took Power

A Wolf in Sheep’s Clothing

As former U.K. prime minister Margaret Thatcher once quipped: “The trouble with socialism is that eventually you run out of other people’s money.” Venezuelans have learned this lesson the hard way, and it troubles me that voters in Colombia, who have witnessed the influx of refugees fleeing poverty, might now elect a man who would institute the very policies that led to such poverty.

Investors are understandably worried, and Petro’s advisers have been in damage control trying to ease their concerns. Earlier this month, the candidate signed a document stating he wouldn’t nationalize property if elected, but as many have pointed out, the document is not legally binding. It’s strictly political theater.

The same goes for Petro’s suggestion that Colombia could mine Bitcoin using waterfalls. Bitcoin is private property, something for which Petro, a socialist, has not shown much respect.

Bitcoin and Gold Are Incredibly Undervalued

I hope Colombian voters make the right choice next month, especially since authoritarianism is steadily making gains worldwide. According to Freedom House, nearly 40% of the global population now live in countries without basic freedoms, including financial freedoms. That’s the highest proportion since 1997.

It’s these people who could benefit the most from Bitcoin, I believe. As an open-source, decentralized digital asset, Bitcoin transcends borders and can bypass even the most restrictive currency controls, allowing peer-to-peer remittances to be made.

For this reason and more, Venezuela has among the highest “crypto” adoption rates, with some 3 million people, or 10.3% of the population, holding unspecified cryptocurrencies, according to CoinMarketCap. Other emerging countries with elevated inflation, including Sudan, Lebanon, Syria and Turkey, also report having comparatively high levels of crypto adoption.

Forty percent of the world’s population is about 3.2 billion people; meanwhile, the 19 millionth bitcoin was mined earlier this month. If you do the math, that comes out to one bitcoin per 170 people living in repressive regimes. Having said that, I believe Bitcoin is incredibly undervalued at $40,000.

I also believe gold is undervalued at $1,900 an ounce. You can see the precious metal’s true value when you price it in a currency that’s undergone astronomical inflation, including the Turkish lira. Had someone in Turkey bought gold one year ago, they would have seen it double in value as of today. Citizens of Colombia who fear a Petro presidency might want to consider picking up some gold coins or 24 karat gold jewelry.Gold Price in the Turkish Lira Has Doubled in the Past 12 Months

Gold Coins Sales Had Their Best Quarter Since 1999

Gold had a solid first quarter for many of the same reasons as Bitcoin, namely, high inflation and geopolitical risk. The metal’s price rose 8% in the first three months of the year, its best quarter since the second quarter of 2020, and inflows into gold-backed ETFs totaled $17 billion, according to the World Gold Council (WGC).

U.S. investors appeared to be most interested in physical gold, however. The U.S. Mint recorded the second highest first-quarter sales of gold American Eagle coins on record, following 1999’s first-quarter sales. When combined with American Buffalo coins, which were introduced in 2006, sales still came in second place.Demand for U.S. mint Gold Coins in the First Quartwesr of 2022 Was Highest SInce 1999

As always, I recommend a 10% weighting in gold, with 5% in physical gold and 5% in high-quality gold mining stocks and ETFs. I believe a 1% to 2% weighting in Bitcoin and Ether also makes sense.

For more on Bitcoin and Ether, watch the replay of my panel on crypto mining at the Bitcoin 2022 conference by clicking here!


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