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Why gold will be the unexpected winner in the Ukraine catastrophe

 -- Published: Sunday, 27 April 2014 | Print  | Disqus 

By Peter Cooper

The catastrophe for financial markets now unfolding in the Ukraine will have a very positive upside for gold. If Russia invades eastern Ukraine this week what price will gold be by next weekend? $1,350? $1,400? Or much higher?

Only on Friday did the penny begin to drop on Wall Street in the final hours of trading. If the Russians have been orchestrating this crisis right from the start, what is their end-game? Are the 40,000 troops massing as close as a kilometre to the border just there for window dressing? Why do things keep getting worse on the ground in Ukraine?

Phased escalation

Over the weekend so far we have seen further violent clashes between the Ukrainian forces and the Russian-led separatist groups. One of these groups has taken 13 international observers hostage of whom one apparently urgently requires medical attention. Who is giving the orders to these groups? Think a little bit.

What is happening is an escalation that will require a Russian military intervention to ’save’ the situation. Conveniently the forces just happen to be standing by. Another pathetic round of Western sanctions next week will be ignored. But round three of the sanctions will be more significant, particularly from the US side which believes it has less to lose than the Europeans.

Stock markets will fall and bond prices rise as this series of events unfolds. The US dollar will weaken and the yen and Swiss franc gain. That will add to the pressure on Western leaders to stand aside and let Russia deal with problems in its own backyard, nevermind the inconvenient truth that they are of its own making. However, the response will not be entirely without teeth and that invites a Russian response.

Russian response

Will Russia decide to dump its US treasuries? Do they have a more sophisticated response if the US blocks them out of global financial markets? Who knows. It is called uncertainty and fear, the two things that financial markets dislike most.

In such a climate precious metals can be the only winner in a flight to a safe haven without a counter-party and the dollar out of favour. But there has been a huge dislocation in the gold market over the past year with the massive sell-off in gold ETFs and the transportation of that gold to China. When those sellers want that gold back it won’t be there and so the price will go up.

Russia has also been a big buyer of gold in recent years. You could almost think that somebody knew something that we didn’t know. Gold has become tremendously oversold recently and will come bouncing back as other financial markets tank.

If you reckon that is wrong then you are saying stocks will advance to new all-time highs in the most serious geopolitical clash since the end of communism. Can you really be right? Look how gold went up when stocks went down in January.

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 -- Published: Sunday, 27 April 2014 | E-Mail  | Print  | Source:

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