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LAWRIE WILLIAMS: Gold moves ever closer to $2,000 as equities and bitcoin drop

05 Mar 2022

The war in Ukraine has certainly been a game-changer with respect to precious metals prices.  Gold in particular has seen something of a new lease of life (and silver has moved up in price on gold’s coat tails.)  The pgms – palladium in particular – have responded strongly too, but primarily for standard commodity reasons given Russia is the world’s No. 1 producer of palladium (comfortably) and No. 2 in platinum and the stringent sanctions being put in place against Russia put unhindered supply continuation under huge threat.  Russia is also the world’s second or third largest producer of gold – depending on whose statistics one takes to be the most accurate – and sanctions could reduce supply availability for this most important precious metal in terms of the global economy.

As at the end of the past week, the gold price was sitting at $1,972.90 – almost within spitting distance of $2,000, a level which had seemed almost to be out of reach only a week or so ago.  Silver closed the week at $25.73, platinum at $1,122 and palladium at a massive $2,930.  All these constitute price level breakouts from earlier trading ranges.

Russia has already moved to protect its gold mining industry, and its forex reserve position, by re-introducing its central bank’s gold-buying programme after an almost two-year hiatus.  What will happen to Russia’s other major export earners, oil and gas, remains a little more uncertain as the West halts Russian purchases (at considerable cost to some European countries).  China will undoubtedly take up some of this excess supply, but it is doubtful that this is a solution that can take place overnight.

But it is military geopolitical concerns, coupled with ever ongoing global inflation, that may prove most worrying, and could continue to drive gold prices upwards to unprecedented levels.  Russia may consider that any expansion of its military advances is not worth the risk given its lack of success so far in completely overwhelming a smaller and more lightly armed defence force like that of Ukraine.  One assumes NATO would provide much stronger military opposition should Russia continue with attempts to subdue other former European allies that are now NATO member states.  Indeed with calls by the populations of non-member NATO states like Finland to join the alliance, Putin may have succeeded in uniting virtually the whole of Europe against Russia – which can’t be what he had intended.

The overall prospect, though, of a nuclear conflict with a Russia controlled by someone the West considers to be a megalomaniac unhinged Russian leader with a grasp of reality similar to that of former U.S. President Trump, remains a terrifying prospect - particularly if President Putin feels that the only way forward is continued aggression. 

Some feel that Putin has made a huge political miscalculation with his military assault on Ukraine and that the Russian economy could be devastated by the imposed economic sanctions, leading eventually to his fall from power.  If this were to happen then it probably can’t happen soon enough, but Putin’s iron grip on power and the domestic propaganda machine may make this an unlikely prospect.

In its weekly Gold Monitor newsletter the usually extremely conservative Murenbeeld & Co. economic consultancy out of Canada has envisaged six possible outcomes to the Ukraine conflict, but acknowledges that there may be other equally likely conclusions.  The Murenbeeld likely outcomes are as follows, with the first being seen as the most likely:

  1. Kyiv falls, and the Zelenskyy government is replaced with a Russian puppet government (i.e., Ukraine becomes another Belarus).
  2. The West steps up its flow of arms to Ukraine and the Russian invasion grinds to a halt – a lengthy period of diplomacy follows, and Russia pulls its troops out of Ukraine. Zelenskyy relinquishes power as part of the diplomatic solution.
  3. The war turns into an Afghanistan-like nightmare for the Russian military (endless guerilla warfare). The Russian military concludes (1) it cannot take Ukraine with conventional weapons without terrible loss of life (both Russian military and Ukrainian civilian), and (2) that accordingly Putin must be removed from office. (Putin will be assassinated in accordance with honourable Russian traditions.)
  4. Russian citizens rebel against the Putin government, not only over the invasion of Ukraine but also because Russia plunges into a deep depression caused by the unprecedented economic and financial sanctions imposed by the West. The domestic rebellion cannot be quelled without the Russian military turning its guns on Russian citizens, which it refuses to do. The Putin government falls with the assassination of Putin.
  5. The West steps up its flow of arms to Ukraine, Putin decides to employ nuclear weapons in the Ukraine theatre, and NATO capitulates in order to save lives with promises to never allow Ukraine entry into NATO.
  6. The Armageddon scenario: The West steps up its flow of arms to Ukraine, Putin employs nuclear weapons against Ukraine and European NATO members (the latter because of their direct assistance to Ukraine), and NATO and the US retaliate in kind. Russian generals assassinate Putin.

While all of the above are not without possibility, we sincerely hope that at least scenarios 5 and 6 do not come about involving the use of nuclear weaponry, the consequences of which are too horrific to contemplate.  Any of scenarios 1-4 would seem to be within the realms of possible likelihood, although Putin may be too firmly entrenched for his removal from office to be seen as an inevitable event.

While scenario 1 may be considered the most likely given Russia’s weight of troop numbers and sophisticated military equipment, it is hard to envisage the Ukrainian population as a whole acceding to such a solution, making perhaps a combination of 1. and 3. the most likely but without Putin’s assassination.

Whatever the eventual outcome, as long as conflict continues, precious metals prices will likely continue to rise – not only because of their safe haven attributes in the case of gold and silver, but also because of global supply issues for the pgms. 

The other factor boosting gold and silver in particular is continuing, and almost certainly rising, inflation and the likely attempts made to bring it under control.  The enhanced sanctions imposition on Russia is adding to inflationary pressures making the rise virtually impossible to control as long as the sanctions persist, which could be for a long time unless there is a huge Russian climb-down.  Other asset classes like equities and bitcoin look likely to continue to fall as a result thus further improving the prospects for precious metals investors.  We could thus be looking at far higher precious metals prices going forwards than we had previously envisaged.  If we were bullish on this metal class beforehand, which we were, we are at least doubly so in the current geopolitical and inflationary environment.

05 Mar 2022 | Categories: Gold, Silver, US, Russia, Platinum, Palladium, Bitcoin

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