Thomas White Global Investing
Portugal Stamp
July 30, 2010
A Postcard from Europe
Portugal: Falling Back on Gold

Gold bars

Portugal has struggled to rein in its budget deficit, but its huge gold reserves are a source of comfort.

PIIGS. That’s what the international media calls the five European countries of Portugal, Italy, Ireland, Greece and Spain after spiraling debt in these economies forced the world to reset its global recovery clock, and instead rethink the viability of the euro itself. Having always been a quiet performer in Europe, Portugal found itself unexpectedly thrust into the spotlight this year when attention was drawn to its budget deficit, which climbed to 9.4% in 2009. But with 382.5 tons of gold in its coffers, does Portugal have a safety net?

Even as stock markets remain volatile, gold has been the shining star for nervous investors. The precious metal has spiked 11% so far this year and 26% in 2009. Portugal’s 382.5 tons of gold are managed by the Portuguese central bank, Banco de Portugal, and no matter how in debt the country is, a state law prevents the government from laying its hands on the cache or from directly profiting from the assets. Instead, the central bank pays the government an annual dividend each year from any interest it accrues from the gold or any proceeds from sales. Last year, according to Bloomberg, that windfall was $260 million. With this, Portugal has an enviable gold horde, assets that were built up from the time of its former dictator Antonio de Oliveira Salazar’s authoritarian rule. And there is no doubting the preciousness of the asset. Even as Moody’s cut Portugal’s sovereign debt ratings by two notches to A1 from Aa2 in July, gold futures surged to $1200 an ounce. But just how useful is gold to Portugal now? The country has the largest gold reserves among any euro nation. It provides the ultimate buffer against any economic eventuality, and an economic meltdown is a real threat considering that Portugal’s bloated deficit might eventually harm its growth prospects.

The country is not a Greece yet, but its problems are similar. Banco de Portugal itself has warned that the economy might grow just 0.9% in 2010 and as little as 0.2% in 2011, stating that there is a 50% chance that the country will re-enter recession next year. The Portuguese government is working hard on its fiscal management, having introduced a number of ‘austerity’ measures through tax hikes, salary pullbacks and spending cuts, in a bid to cut the country’s deficit to 7.3% of the gross domestic product (GDP) this year and 4.6% of the GDP in 2011. Despite Salazar’s follies, he was prudent in accumulating all that gold. Perhaps, current Prime Minister Jose Socrates might take a page from Salazar’s playbook. But for now, this “P” in the PIIG is plated in solid gold.

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