Ukraine’s invasion and its effect on gold

April 27, 2015 03:26 PM


Back in late March 2014 there was a push for the major banks and construction companies in Russia to delist on the (LSE) London Stock Exchange with the final large bank, Russian Standard Bank, being delisted on Nov. 21. This was the early warning sign to me that Putin was starting to make the moves that the “old school” Muscovite’s wanted from him, which was to start the trip down memory lane of old and raise “the walls” around The Empire once again.

Now, with the ruble having likely completed its collapse and rebounding somewhat from this year’s depths, there is little else  that the West can threaten Putin with--as sanctions will mean nothing once that wall goes up and the world becomes colder as Russia insulates itself for longer term semi-isolation. Putin’s Russia has survived, never having had much by way of  natural resources, so closing the borders once again with sanctions pending is nothing more than a mere  inconvenience to him.

If and when he pushes into the Ukraine this spring Putin stands to pick up two quick benefits he has long desired: their natural resources, which include their estimated natural gas reserves of 1.1 trillion cubic meters (as of 2004), and throw in a fully functional  southern port access to the Black Sea in Odessa. I doubt that he’ll  blink an eye setting this takeover in motion, as there really will be nothing that can be done about it politically, nor the will confront his efforts; as we just witnessed with the recent Iranian missile-for-oil swap. With his Motherland’s major production of metals, energies, timber, wheat and livestock --the assimilation of the old borders will once again start anew as seen in his initial foray into the Ukraine.

Being an active metals broker, one of the first questions I have been getting calls about is: “Will the price of gold skyrocket again now that Putin is kicking more sand around the proverbial sand box?”

So let’s analyze the results should the tank treads rumble in the spring – just how should we view their effect on precious metals. 

Production Fundamentals: I just can’t see how the price of metals will hold steady at these levels because production of gold, silver, palladium and of course the platinum mines in Khabarovsk will stay the same with regards to ore extraction. Yes, they will be under more pressure to produce larger amounts of hard assets to meet the “war demand” but getting more refined product out of the smelter furnaces involves more than just flipping switches, and upgrades take time, involving huge amounts of capital outlay. The reality is that production will stay about the same, and the yields of the ore itself has been slightly less as of late at any rate. Ore yields in pockets or seams will go up-and-down depending on how “rich” the vein is at any given moment in time. The demand internally will go up in the short term taking stockpiled reserves of metals out of the vaults to meet the increased needs of the markets. This means momentarily we will see less availability for the retail market which will create higher prices. 

Another factor is that the flow of finished/refined product will be under greater demand as more producers are asked for these hard assets to meet payments due to outside creditors, just like in the old days. So it will take extra time for that flow to enter the market place.

The conclusion is that production/supply will remain pretty much the same from the East, but demand will go up in the short term due to the above postulation.

The Global Trade of Metals: The perception given to the world by the push into the Ukraine by Russia and its effect on Global Metals Trade will settle quickly, as the Ukrainian war will be bloody yet very short lived. Don’t get me wrong, the Ukrainian soldier is brave and trains hard but they will fall to the Bear as they have before, mainly due to equipment shortages. We should see upward pressure at first with the metals settling back in due course – but not before a head snapping pop to the upside.

The Russian Ruble has been rumored to be produced as a gold backed currency at some point to come. This may just happen in the coming summer months, which also would fuel a push upward of the shiny metal as Putin will need greater reserves to secure the underlying product that would be used to underpin a new Gold Ruble. This would be an interesting follow-up to the invasion of the Ukraine, and result in further strength in the Precious Metals Market overall

So let us conclude: “buyers beware” because it’s going to get choppy moving forward as the above mentioned production fundamentals, coupled with the basic undercurrent of the psychology of war will lead to increased volatility. Both of these two points will drive the Flight to Quality traders into gold very quickly, once triggered

We should see sharp upward movement for the short term once you hear the advancing rumble of armor in the East...







About the Author

Peter Thomas is a senior vice president at the Zaner Precious Metal Division. As a licensed floor broker he was a filling broker in the silver pit back in the days when silver ran to $55 an ounce. He currently manages a global cash desk which handles Refiners, Recyclers, Mining Operations and Coin & Bullion companies.