In destabilizing economic war over Ukraine, gold the winner :--Some very volatile trading in gold and silver yesterday. The former dived to its lowest price since February to around the $1,270 mark before almost immediately rebounding sharply to a little below $1,300 before settling above $1,290, a position it held overnight. Silver, living up to its more volatile general role at one stage dipped down below $19.00, its weakest level since its December lows before it too revived sharply jumping back to close the day at around the $19.60 level before settling back to around $19.55 where it was sitting this morning as Europe opened. Analysts put the price movements to factors such as U.S. economic data, but in this writer’s view the downturn was largely due to a loss in confidence by traders in the prospects for short term precious metals price growth following gold and silver’s lacklustre performance as it drifted downwards – but then the recovery came on the back of the deteriorating situation on the ground in the Ukraine. Ukrainian forces started to move in to quell the demonstrations and government building occupations in the Donetsk region in the east of the country. There are thus fears that any violent clampdown would lead to Russia’s President Putin sending in his troops across the border to protect what Russia sees as its own interests and the interests of ethnic Russians and Russian speakers there. Ukraine seems to be, in effect, a gigantic poker game with serious potential consequences should the major powers talk themselves into a corner where some kind of shooting conflict becomes virtually inevitable. While it seems unlikely that NATO would actually engage Russian forces directly in support of Ukraine, one can’t rule out this possibility. And as for sanctions against Russia these have so far been pinpricks hardly worthy of a response. But should these be escalated into something which seriously affects the Russian economy, which is beginning to look increasingly likely, then Russia will undoubtedly retaliate with its own potentially damaging economic measures against Europe and the U.S. While economic sanctions may have a more drastic effect on the Russian economy than any retaliatory measures might have on the West, the Russian people may be more likely to be prepared to ride out a subsequent economic storm than their Western counterparts. There is a huge gap in ideology and perception about what is happening in Ukraine on the two sides. Russia rates Western support for what it considers an illegal Ukrainian government as yet a further encroachment by the West, and potentially by NATO, on what it sees as its own key area of influence. It has no confidence in NATO denials that it would not move into a West-leaning Ukraine given NATO has broken such commitments in other Eastern European states and much of the propaganda war in progress between Russia and the West is based around this assumption. Ideally Russia seems to want to keep Ukraine as a buffer state between what it sees as the ever-advancing NATO and its own borders. Failing that it has suggested a significant degree of autonomy for the mainly Russian speaking eastern part of Ukraine within a Ukrainian Federation which again could provide a buffer between the West-leaning western and central Ukraine and the Russian borders in the east. President Putin’s strong man image has made him hugely popular in Russia where the people are, to a significant extent, still smarting over what has been seen as ever-continuing western political gains at Russia’s expense. A reversal, or a stop to these would be well received even if it costs some financial hardships in getting there. Perhaps President Putin just can’t afford to be faced down by the West over Ukraine, whatever the effects on the Russian economy! So what does all this have to do with the gold price? Gold tends to move upwards in times of serious political uncertainty and any continuation of the Ukrainian crisis will likely lend support for gold as a safe haven investment. If the crisis escalates further – which it looks as though it well may – punitive sanctions could be imposed by both sides. These could have severely adverse economic consequences for all, and then gold could well come into its own as other markets fall and could thus be rehabilitated in the eyes of the investment public. Under these circumstances, gold could see some very sharp gains indeed and unless Russia, or the West, blinks this seems to be becoming increasingly likely. So far it is the West which has held back, but with increasingly belligerent statements from Secretary of State John Kerry, the U.S. may have to put up or shut up, and the latter would likely be seen by the world, and by the American people, as a very significant weakness on the part of the Obama Administration.
Posted on: Fri, 25 Apr 2014 12:41:00 +0000
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