Monday's reaction to the U.S. and EU's declarations of sanctions against specific members of the Russian political elite was clear. Equities around the world rose sharply with the S&P 500 (NYSEARCA:SPY) pushing away from support near 1845 and the FTSE 100 (ISF) rising 41 points to push away from the 6500 level. In general, the tepid response to the Crimean referendum to rejoin the Russian Federation was met with risk-on market action as the situation looks to be de-escalating for now. This has been bearish for gold (NYSEARCA:GLD) in the near term, but the long term implications for gold remain resoundingly bullish.
Tuesday's speech by Russian President Vladimir Putin and the subsequent treaty signing creating two new provinces in Russia was met with further buying as currency markets led stock futures higher. In the process gold and silver (NYSEARCA:SLV) were hit hard, following through on Friday's weakness. Gold backed off $40 over the three days after hitting a high of $1395, and tested the breakout level at $1350. Silver crashed back through $21 in sympathy with gold along with commodity markets, erasing gains made last week.
Markets have a way of cutting through rhetoric and reacting to actions when those actions are decisive. If the Crimean vote had been less one-sided the situation may be different but the overwhelming majority tied the hands of the West who cannot engage in financial warfare with Russia and China at this point and expect to come out on top. So, despite the bellicosity emanating from Brussels and Washington markets rightly are reacting to the peaceful transfer of power in Crimea.
At least for now. But, Crimea is just the beginning. And events are moving quickly. Right after the treaty signing ceremony Moldavia s Transnistria region has asked for accession into the Russian Federation while the EU moves to expedite Moldavia's assimilation into it.
What the Currencies Tell Us
While equity markets are rejoicing the currency markets are signaling that trend changes that started in January are still in effect. The Japanese Yen (NYSEARCA:FXY) is still appreciating and has moved back below ¥102 and the medium-term trend for more Yen strength is still in place. As I've discussed in previous articles (here and here) the euro (NYSEARCA:FXE) and the Yen are the fulcrums for understanding where the markets are headed in the medium term. The breakout staged by the Yen to begin March has failed and it is now has a very high probability of breaking down below ¥101 in the coming days.
The trend for both the yen and the euro is up, which means that the USDX (NYSEARCA:UUP) is headed down. The euro continues to struggle above $1.39 but it is not retreating. Instead, it is now building a base this week at this level for a run towards $1.40. I would prefer to see a break of last week's high to confirm this, however.
If the euro stages a rally and closes near $1.40 this week along with further Yen strength then that would mean that the current weakness in gold is temporary, simply blowing away a bit of the "war-trade" froth that made its way into gold. Gold will not trade bearishly for long against a fundamentally weaker dollar.
The Next Set of Moves
If the U.S. and EU counter the annexation of Crimea with increased support for the government in Kiev and more stringent financial sanctions then the current relief rally in risk-on assets will reverse quickly. I have no doubt that if pushed hard enough Russian President Vladimir Putin will retaliate to attack the petrodollar by declaring the U.S. dollar unacceptable as payment for Russian oil and gas. This, to me, is the end-game move that would completely upset the current global system.
And, for that reason I'm not placing a very high probability on it happening, and neither are the markets. What will continue, however, is further erosion of the dollar's place in international trade and with it a gradual erosion of its purchasing power. This is why the outcome in Crimea is fundamentally bullish for gold no matter what happens.
If the U.S. backs down, the dollar will be marginalized slowly as Russia and China continue to push their agenda to become major gravitational poles in the global economy. If the U.S. does not back down then Russia and China accelerate plans to destroy the dollar and create a fragmented global monetary system. In my opinion the current sitting government in Kiev is the Eastern European equivalent of a junta and is the major wild card in the entire affair.
Like we have seen in Pakistan, Afghanistan, Iraq, Egypt and Libya the U.S.'s intervention does not bring peace to the region. Given the history it is very possible for the current Ukraine government to go it alone and create a conflict which brings Russia and the U.S. closer to blows than they currently are.
So, while this week may be bad for gold the current long-term trend is bullish on a mix of geopolitics, currency market positioning and global debt deflation. Given its trading history there is a strong probability of another $10-15 downside risk this week, but it will not be enough to break the current weekly uptrend. A close below last week's low of $1328.20 this week will be needed to do that. Since this is a triple witching options expiration Friday coming up I would not be surprised to see a lot of volatility for the rest of the week given how far gold has moved since the beginning of the year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. I own physical gold, silver a few dairy goats and a healthy distrust of all government statistics