Russian Aggression In The Crimea And Ukraine May Give Gold And Natural Gas A Boost

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 |  Includes: ABX, AEM, AGOL, BOIL, DCNG, DGAZ, DGL, DGLD, DGP, DGZ, DRGDF, DZZ, GAZ, GEUR, GGBP, GLD, GLDE, GLDI, GLL, GYEN, IAG, IAU, KOLD, NAGS, PHYS, RDS.A, SGOL, TBAR, UBG, UGAZ, UGL, UGLD, UNG, UNL
by: Michael Blair

Summary

Russia is moving ahead to annex the Crimea and may enter the Ukraine.

Threats of sanctions by Western leaders seem hollow.

Europe depends on Russia for 40% of its natural gas supply.

The tension is likely good for short term treasuries, gold and European natural gas suppliers.

Persistent tension could dampen economic growth and add to volatility. Smart money steps aside.

Tensions in the Ukraine and in the Crimea are coming to a head. Today's vote by people living in the Crimea to join Russia passed by a landslide and the Russians are reportedly moving troops into parts of the Ukraine. Annexation of the Crimea and ultimately the Ukraine is a distinct possibility.

Western leaders are about to pull a "Neville Chamberlain" whose policy of appeasement and signing of the Munich Agreement did little to stop Hitler from moving on from the German annexation of the Sudetenland to order the German army's march into Poland, kicking off World War II.

Why should the West care whether the Crimea or the Ukraine become parts of Russia?

Perhaps we should not care. But the time to take a position for or against has come and passed and whatever bluff President Obama made has been called and there seems very little the West can do at this point but pontificate and object. The United Nations is hardly united on the issue. One has to wonder if the West's objection was based on any rational policy concern or just to oppose whatever Russia wanted. The fact that the overwhelming majority of people living in the Crimea wanted to join Russia should have some resonance with leaders who espouse self determination and there seemed little likelihood the vote was rigged in any way.

From an investor's point of view the issue is a lot clearer than territorial disputes and the risk of subjugation of a fledgling democracy into the orbit of Vladmir Putin. Europe gets about 40% of its natural gas from Russia and there are few alternative sources today.

Nonetheless, President Obama promises "sanctions". Those sanctions might bite back. A shortage of natural gas in Europe could be quite disruptive. Higher prices are a likely outcome even if supplies are not disrupted.

Russians are withdrawing their funds from North American banks at an alarming rate. Bloomberg reports the Fed's custodial holdings dropped $105 billion in the week ended March 12, 2014 with speculation that Russian withdrawals are the culprit for much of the decline.

The Financial Times reports that Russian bankers advise they have withdrawn over $100 billion from western banks. A few hundred billion here or there may not make a massive difference to western banks but the billions add up and the loss of those deposits may have an effect on credit availability. More importantly, trade with Russia is sure to suffer as long as the tensions persist.

For my money, this kind of tension speaks volumes to the risks of being invested in the current milieu. Stock prices are at all-time highs; interest rates are near all-time lows; there are pockets of instability in Argentina, Venezuela, Brazil, Turkey, South Africa and more recently weakness in China. Do investors need a lot more evidence of risk to move to the sidelines?

Watch treasuries strengthen, gold prices rise and economic growth begin to stutter. Then decide where to place your bets.

Beaten down gold miners like Barrick Gold (NYSE:ABX), Iamgold (NYSE:IAG) Detour Gold (OTCPK:DRGDF) and Agnico Eagle (NYSE:AEM) might be short term beneficiaries. The threat of natural gas shortages in Europe has to be good for Royal Dutch Shell (NYSE:RDS.A). These are at best trading opportunities. In my view, smart money moves to the sidelines.

I am long Iamgold and have no position in any other company mentioned.

Disclosure: I am long IAG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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