Argentines are buying more gold than ever to protect their savings from the Western Hemisphere’s fastest inflation as the country’s bonds suffer the worst returns in developing nations.
While Goldman Sachs Group Inc. called for gold prices to peak last month and billionaire George Soros cut his stake by more than half, Banco de la Ciudad de Buenos Aires, Argentina’s only gold trader, is talking with mining companies to buy the metal directly as surging demand exhausts its supply of scrap. The bank began marketing gold to individuals after the nation tightened currency controls in October 2011, selling 280 kilos in its first year for 102.6 million pesos ($20 million).
Argentines are turning to the precious metal to preserve the value of their savings as economists forecast the peso will lose more value than any currency in the world and President Cristina Fernandez de Kirchner bans most dollar purchases. The nation’s estimated inflation rate of 26 percent is also eroding the value of fixed-income securities, causing Argentina’s peso-denominated bonds to lose 5.5 percent this year versus a 2.2 percent gain in emerging markets, according Barclays Plc.
“I’m buying gold every chance I get,” Guillermo Acosta, a 27-year-old security guard, said inside a branch of Banco Ciudad in downtown Buenos Aires. “With this inflation, I feel like my savings will evaporate if I keep them in pesos.”
Acosta’s initial investment of 10 grams of gold in February last year has returned 47 percent as the price per gram rose to 381.5 pesos from 260 pesos.
Argentina’s government dollar-denominated bonds fell an average 14.3 percent in that span, according to JPMorgan Chase & Co.’s EMBI global index, and the peso weakened 15 percent.
The nation hasn’t borrowed money from overseas debt markets since its $95 billion default in 2001 and Fernandez’s increasing influence over the economy since her re-election in 2011 has pushed up the interest that bond investors demand to 13.9 percent, or three times the average in emerging markets.
With Argentina printing pesos to finance itself, the amount of pesos in the economy has increased 38 percent in the past year, leading analysts to anticipate that the currency will depreciate 12.9 percent through year-end, the most among currencies tracked by Bloomberg.
Banco Ciudad is the only bank left that trades the metal after Fernandez in July banned the purchase of certified 99.99 percent pure gold for savings. The bank sells it at 99.96 percent purity, according to Carlos Leiza, who oversees the lender’s gold trading.
“The boom goes in hand with the inability to buy dollars,” he said in an interview at his office in Buenos Aires. “People are looking for alternatives that at least implicitly hold the value of the dollar. The demand has been strong for over a year now. We can barely keep up.”
The extra yield that investors demand to hold Argentine government dollar-denominated debt instead of Treasuries narrowed 13 basis points, or 0.13 percentage point, to 1,170 basis points at 5 p.m. in New York, according to JPMorgan’s EMBI Global index.
The cost of protecting $10 million of Argentine government debt against default for five years with credit-default swaps rose 55 basis points to 3,088 basis points, data compiled by Bloomberg show.
Last year, Banco Ciudad limited purchases to 100 grams per person per day in direct sales to individuals. Investors who want to speculate on the price of gold without actually owning the metal are also buying record amounts of futures contracts.
The number of open futures contracts due in June in the Rosario Futures Exchange, where they are traded locally, climbed 183 percent in the past year to 14,508, and reached an all-time high of 15,276 on Jan. 29.
“Faced with the inability to buy foreign currency, investors are seeing gold futures as a good option to dollarize their portfolios,” said Sebastian Porcel, director of Buenos Aires-based futures brokerage Global Agro. “The fact that people are going through the burden of owning actual gold bars shows the huge need they have to protect savings.”
While demand for gold is rising in Argentina, Goldman Sachs last month cut its three-month target to $1,615 an ounce from $1,825, and also chopped its six- and 12-month forecasts. The bank said the cycle for gold prices, which has climbed for 12 straight years, has probably turned as the recovery in the U.S. economy gathers momentum and investments decrease.
Soros reduced his stake in the SPDR Gold Trust, the biggest gold exchange-traded fund, by 55 percent in the fourth quarter, filings showed last month.
Gold futures traded in New York have fallen 11 percent in the past six months.
The difference between the prices to buy and sell gold is greater than the gap when trading futures, meaning investors are more at risk of losing money when they need to sell, according to Claudio Burelli, the head of the currency trading desk at Buenos Aires-based brokerage Puente Hermanos Sociedad de Bolsa.
There is a 35 percent difference between the prices to buy and sell gold at Banco Ciudad, while there’s no premium to sell the country’s benchmark 2017 dollar bond in the local market, according to the Buenos Aires-based Open Electronic Market, known as MAE.
“There’s a big spread in prices, so to make money, not only does the price of gold have to rise, you have to beat that gap,” said Burelli, who sold gold before it was restricted.
Gold sold by Banco Ciudad also isn’t recognized internationally, making it more difficult to determine its value, he said.
The cost of 100 grams of gold in Argentina as of last week was 36,646 pesos. In New York, the same amount based on the benchmark troy ounce (31 grams) sold for about $5,126.
The bank multiplies that price by 0.95 to account for the lower quality of the gold to get a dollar price of $4,870.
While the implied exchange rate of 7.5 pesos per dollar is higher than the official rate of 5.09, it’s still better than the rate of 8 pesos per dollar in the black market.
“Historically, gold has been seen as a store of value, so as long as options for doing that in Argentina are limited, people are going to keep buying it,” Banco Ciudad’s Leiza said.