LAWRIE WILLIAMS: Russia, Ukraine, Inflation and Gold
The Russian invasion of Ukraine has now been under way for a little over a month, with wildly contradictory statements as to whether Russian objectives have been achieved or not. Russian media talks of success in meeting the battle plan, whereas Western media suggest that the Russian advance has completely stalled despite superior troop numbers and weaponry.
Certainly the West’s version of events is supported by disturbing images of the destruction meted out to Ukrainian cities like Mariopol, Kharkiv and Chernihiv, which have all so far remained under Ukrainian control. The civilian toll has appeared to have been horrendous, particularly in Mariopol, and there are reports that up to 40% of the Ukrainian population has been displaced with around 3 million people having fled the country to friendly neighbouring nations. It also seems to appear that Ukrainian forces are regaining control of some areas from which they had been driven out and of poor morale, and even of some sabotage, within the Russian military.
How much of this reporting is strictly accurate remains to be seen – the truth is always one of the first casualties of war - but the Western version of events seems to be more believable that that put out by Russian state-controlled media. Certainly the drastic measures taken by the Russian government to control domestic opinion strongly support the Western interpretation. But nevertheless President Putin can seem to do little wrong in the eyes of most of the Russian population.
Ukrainian resistance and desire to hang on to independence seems to have surprised the Russian military and its losses of personnel and equipment appear to have been far higher than anticipated. In the more heavily populated north of the country Russia seems to be making little, if any, progress and while its gains in the south, along the Black Sea coast – helped by a hugely superior naval force – looks to have been more successful despite some heroic Ukrainian fightbacks.
One recognition that the Russian advance is not going quite to plan, and that Western economic sanctions are hurting far more than admitted, may be that some concessions are being made in Russian demands in the current so-called peace negotiations in Istanbul. If things had been going to plan it is doubtful that such concessions would be considered, but one suspects that some Russian demands may be totally unacceptable to Ukraine in any case despite the devastation and misery being endured by some of its population.
There has been some indication by the Russians, some of which has been confirmed by satellite imagery, that some Russian troops may be withdrawing in the north and in particular in their attempts to overrun Kyiv and Chernihiv in particular. The cynics among us see this as a redeployment of Russian forces in their attempts to 'liberate' the parts of the Donbass and Black Sea coastline not already under their control. But Ukrainian resistance in these areas remains strong amidst reports of Ukrainian gains in and around Kherson - so far the only major Ukrainian city to fall under Russian control.
So far the effects on the global gold price, which is presumed to benefit strongly from such serious geopolitical events, have been somewhat muted apart from a huge surge in early March, since partially reversed. However, it is our view that the already high inflation level, exacerbated by Russian and Ukrainian export interruption due to the conflict, plus the enhanced sanctions on Russia, will combine to keep global inflation high, and possibly rising, for many months to come, which will also be of some benefit to gold prices. Indeed, if inflation is seen as likely to remain high for the foreseeable future, the positive effects on the gold price will likely continue for many months to come, but not without the occasional setback.
Gold mining stocks may be adversely affected by high inflation on supplies and wages, but the miners are mostly already highly profitable at current gold price levels and if the price remains strong the increased benefits to profits will more than outweigh any adverse effects due to cost inflation. The big gamble may be on western quoted Russian gold miners whose prices have crashed on the adverse feelings about Russia in general and the fear of share suspension. However, as long as they can sell their production – Russian domestic gold purchasing is believed to have soared – their profits and dividend yields may come in at ridiculously high levels making them extremely attractive investments. The big downside risk, though, is the possibility of trading in them on western exchanges being suspended altogether, although if this were to happen it might not be permanent. But to bring themselves to invest in Russian stocks may be a matter of conscience too far for many investors.
Beware of general equities though. These tend to do badly in times of high inflation – particularly if this is seen to threaten the overall economy. Assets like gold, which tend to do well as wealth protectors in recessionary times when equities tend to suffer – or even crash - are therefore probably a much better bet at the moment.