LAWRIE WILLIAMS: Gold closes the week a smidgeon below $1,900 and silver just below $24
We have been dubious all along about the presumed motives behind Russia carrying out enormous military exercises on Ukraine’s borders. We had reckoned that an all-out war between the two nations was unlikely given the effective power balance between the Ukrainian army and the capabilities the troops and equipment Russia is in a position to unleash. Casualty levels on both sides would almost certainly be too horrendous to contemplate should there actually be a full-scale military confrontation.
In our assessment President Putin is playing mind games with NATO and the West to make a political point. He has no wish for Ukraine to join NATO and thereby facilitate putting even more potentially hostile troops and armaments on Russia’s borders even if NATO claims that they are only defensive. They would still, in Russian eyes, be considered a threat to the nation’s security. There are definitely parallels to be borne with the 1960s standoff between the U.S. and Russia when the latter was placing missiles in Cuba within striking range of U.S. cities, when the boot was very much on the other foot! Perceived antagonism between Russia and the West is very much an integral part of modern day confrontational politics. Politicians need an overt enemy to help them maintain their domestic positions. In the case of the U.S. and Europe, Russia remains the overt threat, while in Russia the reverse is true.
Russia has described the West’s obsession that it is planning to invade Ukraine as ‘fantasy’, and it may well prove to be so, although admittedly one that has been totally instigated by Russia’s seemingly provocative moves. The motive may well be an attempt to assess for the long term what the West’s likely reactions would be to any attempt to re-activate Russian hegemony over what it still regards as its natural geographic area of influence and also to build pressure on the Ukrainian government to withdraw its NATO-joining aspirations.
In the past week, the gold price has, on occasion, breached the $1,900 level, but so far has not done so permanently. However we have little doubt that it will achieve this before too long and may well then see $1,900 as a base from which to grow. However it was not allowed to end the week above $1,900 as the claimed ‘imminent and inevitable’ Russian invasion of Ukraine has so far failed to materialise. Even so it ended the week within close touching distance of the $1,900 barrier, while silver ended the week a tiny bit below the $24 level.
As we have been noting all along, the inflationary threat to the U.S. economy should probably be taking pride of place in U.S. economic policy, rather than the diversion of a possible military conflict in Europe. The latest Producer Price Index data for January, demonstrating a year-on-year rise of 9.7% in U.S. wholesale prices, serves to add emphasis to this view. It suggests that inflation is even more deep-seated than other measures, like the CPI and PCE indexes might suggest.
The U.S. Federal Reserve has intimated, in its recent statements, that inflationary pressures are probably steeper, and likely to be longer-lived, than it had been predicting earlier. It may be under pressure to raise interest levels more aggressively than it has so far indicated, but it may also still remain reluctant to increase rates to combat the inflationary trends at a significantly higher margin than it had previously been suggesting – even in its most ‘hawkish’ statements - for fear of precipitating a major U.S. economic recession by so doing. U.S. equities have recently been showing signs of increasing weakness anyway and it might not take much in the way of higher than anticipated interest rate increases ahead to initiate a major stock market crash, which might be seen as a defeat for the Biden Administration’s economic management.
Overall, the continuing significant negative real interest rate levels, coupled with possibly weaker equities and bitcoin, should keep gold and silver prices stronger. Should equities start to crash hard, as they well may, then the safe haven attributes of the precious metals should come even further to the investment fore, whether Russia does invade Ukraine or not. After suffering a couple of periods of perceived weakness we do see some positivity in gold therefore which could well take it back up to the $2,000 level sooner rather than later and may even prompt us to raise our year-end gold price forecast to well above the $2,000 level accordingly.