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LAWRIE WILLIAMS: Russian sanctions and gold reserves

Following on from Russia’s unprovoked attack on Ukraine, the Russian advance does not appear to have gone as smoothly as President Putin may have envisaged, although the flurry of claims from both sides make detailed and accurate analysis difficult to compile.  Certainly independent news reports out of Ukraine’s capital city, Kyiv (Kiev) suggest that this key target for the Russian forces remains in Ukrainian hands so far, although the situation in the country’s second city, Kharkiv, is more difficult to confirm.  Both sides have claimed it is under their control at the time of writing.

Certainly Ukrainian resistance to the Russian attack, despite the latter’s numeric and advanced weaponry superiority, has been much stronger than the Russian military had apparently expected.  Contrary to the open-armed reception the Russian forces had been led to believe they would receive, the strength and purpose of Ukrainian resistance to occupation must have proved to be a salutary awakening.   Nevertheless the Russian advance continues and one suspects the pure weight of numbers and the weaponry the aggressor can bring to bear, is almost certain to win the battle and Ukraine may be subjugated unless a diplomatic solution can be negotiated.  However the military cost of a protracted occupation for Russia would be considerable and a subsequent resistance movement throughout Ukraine may prove difficult to control.

It certainly looks at this initial stage of the conflict that President Putin may well have underestimated the degree of resistance and the subsequent military and economic costs involved,  Condemnation of the invasion worldwide has been almost universal, the imposition of economic sanctions will be damaging and the cutting off of key Russian banks from the SWIFT international money transfer system will create difficulties in international trade despite the country’s attempts to set up a system to bypass it.

The successes of the Ukrainian resistance will have been damaging to any sense of Russian military invincibility and may dissuade President Putin from taking on any similar exercise – particularly if this were to create conflict with NATO with its own access tp modern high-tech weaponry and well-trained military personnel.

The effects on the gold market have certainly been mixed, and perhaps puzzling.  Initially gold surged putting on well over $100, but then it lost most of its gains as markets considered that the initially proposed sanctions regime might not be as damaging to those instigating it as initially thought.  Gold thus closed the week below the key $1,900 level and equities regained much of the ground they had lost.  But, we suspect, things have not yet settled down and we may well see gold gain ground again, and equities fall back, in the days and weeks ahead.

We have another FOMC meeting coming up in a couple of weeks’ time at which the U.S. Federal Reserve seems likely to start increasing interest rates to try and combat inflation.  There is even the consideration that it might well make its initial interest rate rise 50 basis points instead of the usual 25.  What that would do to the equities markets and the U.S. economy is difficult to judge.  But there is the fear that, if a 50 basis point rise is implemented, the stock market could take a sharp dive and U.S. economic growth would be severely curtailed and a recession may ensue.  Under these circumstances gold could well take another leg up.  We shall see what actually transpires before too long, but undoubtedly the markets may become more volatile in the anticipation thereof.

Inflation thus remains a major problem and that is likely to be exacerbated by the new Russian sanctions regime – particularly with its likely impact on energy prices.  Gold may also be affected given Russia is either the world’s second or third largest gold producer and if sanctions prevent the Russian gold producers from accessing international markets to sell their output that could reduce gold supply availability worldwide.  It could, however, also force the Russian central bank to restart increasing its gold reserves by buying up the gold which may no longer be destined for international markets.

The whole Russian invasion scenario raises some disturbing questions too about the mental state of some of the world’s most prominent leaders. President Putin seemed to be utilising the apparent conspiracy theory of Ukraine genocide of ethnic Russians inside its borders, which seems unlikely given that around half the Ukrainian population is ethnic Russian.  Perhaps President Putin actually believes this to be the case though much as former U.S. President Trump seems to believe that the Presidency was stolen at the last election – another conspiracy theory easily disproven.  Trump also seems to consider Putin’s move on Ukraine a political masterstroke and he seems likely to run for the U.S. Presidency again in the next election – and may even win a second term. To this observer the fact that two of the world’s rival superpowers might be controlled by leaders who appear to perhaps have their key decisions driven by conspiracy theories, is worrying in the extreme.

27 Feb 2022 | Categories: Gold, Russia, US, FOMC

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