LAWRIE WILLIAMS: Russia/Ukraine tensions ease and precious metals dip.
As we had predicted, the purported Russian invasion of Ukraine looks to have been more of a myth than reality as some Russian troops and armament is seen to be withdrawing from the Ukraine border area. Maybe President Putin feels he has made his point and, no doubt, NATO and the West will claim that their diplomacy has won the day after all, even if there was never a real likelihood of a Russian invasion move in the first place.
We suspect that, as it has been claimed by Russia all along, that the troop movements have just been part of a major military exercise. However the proximity of this to the Ukraine border probably also had strategic objectives. This would be to assess the likely Ukraine defensive action and Western support were Russia to contemplate a Ukraine incursion at a later date. It could also be an attempt to influence aspirations by Ukraine against joining NATO and the latter’s reaction should such a request be affirmed. Russia probably has the means, anyway, to bring the Ukraine economy to its knees without resorting to what would likely be an extremely costly military attack in terms of lives lost and Western economic sanctions.
Western media is also full of reports of how the Russian position was perhaps misleadingly presented to its own people, but maybe that is, in reality, no different to the way Russia is demonised in Western media. Wars nowadays tend to be a battle for the hearts and minds of the general public who may, or may not, support military confrontation. Was it ever thus?
The net result in the markets, though, of an apparent easing of tensions, has been a sharp marking down of precious metals prices. These had been buoyed up by the geopolitical uncertainties which had been largely instigated by the Western media coverage, egged on by the politicians. As usual, the consequences in terms of price movements have probably been overdone and it may yet be some time before equilibrium returns. Inflationary trends, and moves to keep them under control, should be the principal driving force behind current precious metals price reaction and this will probably be data driven up until the next FOMC meeting, due to take place in mid-March. This should give a better idea of how aggressive the U.S. Federal Reserve Bank (the Fed) is likely to be in its attempts to bring rapidly rising inflation under control.
The Fed will also perhaps be encouraged in that equity market reaction to its apparently more ‘hawkish’ stance has, so far, not been too disturbing, while the latest coronavirus infection surge seems to be coming down fast. In combination, this suggests the U.S. economy should be in relatively strong recovery mode, despite the effects of the high inflation level likely curtaining retail sales growth until the inflation level reduces substantially.
We still feel that the overall economic situation remains positive for gold and silver as safe haven assets, but the possible easing of some global tensions will provide a setback they may take time from which to recover. Negative real interest rates remain the overall key to gold and silver’s performance and these are likely to remain for many months to come.