With gold hovering around the $1370 level this morning – a level which has confounded the very bearish bank analyst sector – gold has, been by far the best asset class to be invested in so far this year, beating even the other precious metals which might seem to have even more going for them.
But, the analysts will say that they could not have predicted the flare-up in the Ukraine and the subsequent aggressive moves by Russia which look as though they will see the annexation of Crimea. It seems Ukraine is virtually powerless beyond gleaning Western support, which could result in sanctions being imposed on Russia, given its likely intransigence in the matter, with the threat of further escalation overhanging the situation. This proverbial ‘Black Swan’ event has been, in our view, the principal driver behind the recent rise in the gold price, although gold traders in the West were perhaps reluctant to take this on board in the early stages. There is little sign of any de-escalation as Crimea moves towards its referendum on independence from Ukraine, and to become part of Russia again, on Sunday. It would seem likely to see a positive vote for this and the time for pulling back from the brink is probably now behind us.
So, what happens next? Assuming Crimea votes to rejoin Russia and Russia accedes – and it’s difficult to see the latter not accepting this as it is very much the perceived will of the Russian people hugely influenced by state-controlled media – the West will likely begin imposing sanctions next week (it too has talked itself into a corner where this seems virtually inevitable – such is Realpolitik). Russia will retaliate and, depending on the degree of sanctions imposed, may well renege on its big Western debts which, with many Western banks already in a precarious financial position, could lead to a renewed spate of turmoil in the global financial markets.
Given much of the big rises in Western equity markets over the past couple of years has been based on little beyond hot air and QE (which is being slowly withdrawn in the biggest market of all) – the potential for another market collapse, which could dwarf that of 2008, is strong.
Gold would not be immune from such a collapse, as we saw in 2008, as institutions struggle for liquidity, but it wouldn’t fall as far as the market indices in such a scenario, and would recover far faster. In 2008 gold fell back sharply along with everything else but had recovered from its fall in around 4 months – and then went on to virtually double in the next 4 years before its more recent downturn. In this situation the pessimistic bank analysts could well claim justification in seeing gold back at $1,000 but not in the manner they had envisaged with virtually all other asset classes performing perhaps far worse and gold, as the ultimate ‘safe haven’ asset, hugely outperforming in the subsequent recovery.
Now this is obviously not a foregone conclusion – just one of the scenarios which could arise from a continuation of the impasse over Russia/Crimea/Ukraine and subsequent action by both sides which have talked themselves into a corner where serious inaction may be politically unthinkable should the current standoff continue – or perhaps escalate further. We don’t see the West (NATO) getting into a shooting war with Russia – the possible consequences are beyond serious – but ever increasing tit-for-tat sanctions could strongly destabilise the Western and Russian economies. This looks increasingly like the kind of path which could lie ahead unless some kind of diplomatic solution can be found quickly, and this, to say the least, is looking increasingly unlikely.
Short term, of course, and long term this would likely be very positive for gold – it’s the medium term which could be the worry for the gold holder. If the Russia/Ukraine situation escalates and Russia sends troops into the south eastern (largely ethnic Russian) Ukraine then gold could well move into the $1,400s or higher in a big knee-jerk reaction. But then as probable tit-for-tat sanctions start to bite on both sides the price could well fall back to around the $1,000 level, while the main equity indices halve, or even worse.
Certainly major Western stock indices are already beginning to stutter – and tomorrow is the ‘Ides of March’ which we suggested, rather tongue in cheek, in an article written exactly a month ago, could be the turning point in the Dow which could be starting to experience a major downturn. Ukraine could well be the ultimate trigger for this, although the timing is purely coincidental. Temporarily at least we could also see a big corresponding jump in the gold price. $1,400 is seen as perhaps the next major resistance level but this tends to be so as it’s a point where computer-generated selling for profits may come in strong, although this could also be counterbalanced by some serious short covering.
So it looks as if we could be heading for some very volatile days or weeks in the markets, dependent very much on the political and financial fallout over Ukraine. But other market factors also remain fairly positive for gold with some significant inflows into the big SPDR gold ETF (GLD). The market will be looking closely at whether these continue or not. On the other hand, we have seen a resumption in central bank gold sales in January (although these are distorted by Turkey which was the big seller. But Turkey includes gold held on deposit with it by commercial banks as part of its bullion holdings, thus selling by these banks for liquidity purposes shows up in the central bank figures, but may not denote true selling by the central bank itself). Without the Turkish ‘sale’ central bank net holdings would have been down marginally by about 0.2 tonnes, but this is not significant unless the flat trend continues. Last year central banks bought some 368.6 tonnes of gold, but volumes were seen to be declining in the second half.
Chinese gold consumption is also reported as being off its peaks by the China Gold Association, although this assertion is disputed by Koos Jansen on his ‘In gold we trust’ website which analyses Shanghai Gold Exchange figures. However January and February are generally weakish months for Chinese gold imports given the Lunar New Year holiday period – and reported SGE premia on gold are sharply down seen as indicating some purchasing weakness.
But Russia/Ukraine will likely drive the gold price short term and without any diplomatic solution on the horizon this will likely be upwards in the short term – with the prospect of a sharp increase should matters escalate. But we shall see. Nothing is ever certain with the gold market.