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LAWRIE WILLIAMS: No war yet. Gold price supported by fear element

As we suggested at the end of last week, Russia seems to have held off on any full scale Ukraine invasion so far despite strident warnings by Western media and prominent politicians that military action was imminent and inevitable.  We don’t necessarily agree and think the President Putin is making a point, albeit an extremely expensive one, regarding what Russia sees as NATO encroachment eastwards contrary to what it reckons were Western commitments not to do so.  Ukraine joining NATO, which it apparently has aspirations to do, would be a step too far and would be considered an overtly hostile act by the Russians.  Enough is already more than enough in their view.

The dangers of a Russia/Ukraine military conflict could be immense in global terms.  If Russia perceives Ukraine joining NATO as a realistic threat, it might well retaliate by placing missiles in Cuba (again) and a number of Latin American nations with which it has increasingly strong alliances.  Tensions could roll over into east Asia too with President Xi taking a leaf out of the Putin book and ramping up pressure on Taiwan which it has long claimed to be an integral part of China.

Also, in conjunction with North Korea, China could try and pressurise the U.S. to withdraw its military presence from the Republic of Korea (RoK) and the prospect of some kind of naval military action in the South China Sea between the Chinese and U.S. navies could become a reality. 

Geopolitical action pitting one nuclear-armed superpower against another has to be making the whole world a more dangerous place for us all.  Increasingly bitter confrontational rhetoric could easily become a trigger for military involvement, as it has done in the past.  East and West could be painting themselves into a corner from which the only exit might result in a local engagement, which could easily spill out of control with global implications.  Modern weaponry makes this an increasingly frightening prospect.

Maybe the above all represents an unlikely worst case scenario.  But then nobody could perhaps have foreseen that a 1914 assassination of a Grand Duke and his wife in Sarajevo could have led to a conflict which saw the deaths of millions.  Furthermore it probably destabilised the world as we know it for nearly half a century leading, ultimately, to a second global conflict which led to the deaths of millions more.  Be warned.

With U.S. markets closed for Presidents Day today, gold and silver have been marked down in Europe – presumably on the non-occurrence of a Russia/Ukraine invasion so far.  However off-market trade in the U.S. may well see them bounce back again during the day given the U.S. media’s almost universal obsession with the likelihood of conflict, supported by numerous supposed intelligence reports of Russia being about to launch an imminent offensive. 

We shall see, but with the prospect of a military stalemate given the balance of power on both sides of the Ukraine border Russia may be reluctant to launch an attack if there is any chance that it might be repulsed if it were to do so.  Anything apart from a rapid capitulation of Kyiv, which is by no means a certainty, might be seen as a defeat for the Russian army, which would reduce its perceived invincibility in an open warfare situation against a considered weaker opponent like Ukraine.  To us the risk element is too high for Russia to risk a full-scale onslaught.

However as long as the invasion threat continues – and there seems to be little sign of any de-escalation - safe haven assets like gold will almost certainly remain strong.  If this is coupled with risk asset price deterioration, which may well be forthcoming given the possible effects of global central bank attempts to minimise inflation levels through the imposition of higher interest rates, then this could be doubly so.  In our view, equities and bitcoin are in a bubble which has the potential to burst dramatically which would definitely be to the longer term benefit of precious metals, although they may suffer also from temporary selling pressure as funds and institutions struggle for liquidity if such a scenario develops.

With so many stocks, particularly in the tech sector, trading at levels based on seemingly unattainable short to medium term profit projections an equity shake-out looks to be inevitable.  And, as for bitcoin, this has been a speculator’s dream with little inherent value and has to be ripe for a huge meltdown    Talk about assets built on horrendously weak foundations!  There has to be a huge coterie of social media-inspired speculators out there who have little or no concept of market realities.  When the market turns against them, as it undoubtedly will, the downfall can be rapid and financially devastating. 

The only real protection therefore has to be investment in assets like gold, which has a long history of retaining, or even increasing, in value when other assets are in strong decline.  Stick with investment safety which has stood the tests of time for long term wealth protection.

21 Feb 2022 | Categories: Gold, Silver, China, Russia, US, Bitcoin

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