- Russia is at odds with the West, and because of its understanding of its economic vulnerability, is acting to protect itself from a higher degree of economic sanctions.
- Russia is replacing U.S. Treasuries held in its central bank reserves with gold, and it & its businesses are negotiating to settle international trade in currency other than dollars.
- These actions should move Russia into a stronger and better insulated economic position to counter the West, and also add strong support under gold & the SPDR Gold Trust (GLD).
Russia's incursion into Ukraine caused a rift between Russia and the U.S. & Europe. It led the West to issue sanctions against Russia and to threaten to apply deeper cutting actions. Russia recognizes the damage the West can do to its economy today, and so our former cold war foe has begun to take action to protect itself. Its actions include the acquisition of gold reserves replacing U.S. Treasuries, and also the use of other than dollar currencies in its and its businesses' trade settlements. Russian actions may work against the euro and the U.S. dollar, but they should serve gold; because the shiny metal will always be the one currency that has credibility globally, even when the world is not at peace. Thus, despite concerns I've expressed recently regarding a capital flow weight against gold and relative securities, this Russian reality offers a solidifying new support against that for gold and the SPDR Gold Trust (NYSEARCA:GLD).
A Seeking Alpha contributor produced an interesting article in May covering a curious Russian move that counters the U.S. and diversifies Russian reserves away from the dollar. Within the article, my colleague, Hebba Investments, sheds light on a release by the Russian central bank, within which the state revealed that it had purchased a significant amount of gold in April of this year. It was the busiest such month for Russia since 2010, and it came right in the midst of the Ukrainian crisis that had Russia at odds with the West. Hebba warns that gold remains a tiny portion of Russia's reserves, and that if Russia intended to bring its level up to parity with the U.S. and E.U., it would have to buy a lot more gold. In so doing, it would also be selling its U.S. Treasuries. Each of those actions supports a higher gold price for Americans.
Hebba points out that Russia divested itself of $50 billion of U.S. Treasuries between October 2013 and March 2014. If Russia is selling treasuries, it needs to back up its currency and economy with some risk-free equivalent or close. So it has been buying gold. Hebba points out that Russia's monthly acquisition of 30 tonnes of gold comes against a market that only mines 2500 tonnes a year. He also notes that Russia's gold only accounts for 7.9% of its reserves, against U.S. levels of 70.2% and the eurozone's 55.8%. So, therefore, if Russia wants to reach parity and back up its currency with gold, it has a lot more buying to do.
This past week, we learned from the Financial Times that Russia is hedging against the possibility of a higher degree of Western sanctions. Its companies are negotiating with customers to settle trade in currencies other than dollars, including the Chinese yuan (renminbi), Hong Kong dollar, Singapore dollar and Japanese yen. It's a pivot to the East. Andrei Belousov, economic advisor to Vladimir Putin, indicated that Russia is only preparing for the possibility of being frozen out of the U.S. dollar market. However, the de-dollarization of Russia has been in progress since 2007, I would say, because that is when it began buying gold in a significant fashion. Also, we know from Hank Paulson, that Russia sought to undermine the United States during the financial crisis. The article linked to here is a must read that illustrates Russia's ability and interest in acting malevolently against the U.S.
Russia keeps turning up on the wrong side of arguments dating back to at least the Republic of Georgia issue, and including what's occurred in Syria recently. Ukraine has been but the latest point the West and Russia have disagreed upon. I believe there's more to the de-dollarization of Russia than just defensive posturing. Russia seems determined to establish itself as a dominant power beyond just its current importance due to its nuclear arsenal. Once Russia is less sensitive to Western sanctions, it could wage economic war with reduced risk of retribution. This is why I think Russia is working toward reducing its U.S. Treasury interests and replacing them with gold, while also preparing new trade standards with its partners. It's an economic positioning to support its global power play.
Less demand for the dollar is a bad thing, and the efforts Russia has made have been suggested by the Iranians as well regarding that nation's oil trade. China would certainly like the renminbi to be the global currency of choice, but that would be premature and too risky for global trading partners to accept today. Obviously, the euro and dollar are best options as far as fiat currency goes today.
Gold, however, is in my opinion mankind's default currency, and is available to back the reserves of the Russians, the Chinese and whatever other nation seeks it. Of course, the market for it is small, and so the heavy acquisition of gold would drive the price higher quickly and be counterproductive to acquisition efforts. For this reason, I would also expect silver to benefit over the longer term and issues like the iShares Silver Trust (NYSEARCA:SLV) should be supported by this factor.
Precious Metal Relative Securities
SPDR Gold Trust
iShares Silver Trust
Market Vectors Gold Miners (NYSEARCA:GDX)
Direxion Daily Gold Miners Bull 3X Shares (NYSEARCA:NUGT)
Sprott Physical Gold Trust (NYSEARCA:PHYS)
Metals, though, had begun to give back some of their 2014 gains recently, which in my opinion was due to the way made clear for stocks to run higher, and the capital outflows from other investment sectors like the metals into stocks. These issues are discussed in detail in the article linked to below. However, the Russian issue is what I believe has lifted the SPDR Gold Trust and other relatives most recently.
Russian interest in dollar risk reduction is real, and so a support for gold is there as well. For this reason, owning physical gold long term is a solid strategy for investors. For the same reason, the SPDR Gold Trust has a strengthening support working for it against the capital flow issue I pointed out in my last article, S&P 500 Summer Forecast. The dynamics at play here are complex and many are working against one another. It's unclear how long it will take before Russia is confident enough in its economic independence to take a bolder stance against the West, so the factor of capital outflow from gold interests may deserve a higher weighting over the short short-term (30 days). Still, I don't expect it will be long before Russia's cards are on the table and gold demands a higher value. For this reason, I believe investors should look toward opportunities to buy the GLD and gold at lower levels for the long term.