Why Putin And Cheap Oil Are Bad News For Gold Miners

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Includes: ABX, AU, GG, NEM
by: Daniel Jennings

Summary

Russia has been trying to prop up the price of gold with large gold purchases.

Falling oil prices could soon force Russia to stop buying gold because its government is dependent on oil tax revenue.

This could hurt gold miners such as Barrick Gold and Newmont Mining, which are already plagued by plummeting revenues.

The situation could be made worse if Russia has to start selling off gold to make up for lost oil revenues.

Inflation and cheap oil could soon spell the end for Russian President Vladimir Putin.

Cheap oil and Russian President Vladimir Putin are creating a perfect storm that could devastate major gold miners like Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG), and Newmont Mining (NYSE: NEM).

Over the past year the Russian central bank added 115 tons of gold to its reserves, or a 50% increase in gold purchases, The Guardian reported. The amount of gold that Russia has been buying has accelerated in recent months; The Guardian noted that Russian gold purchases increased by 59% between July and September 2014.

Naturally, gold bugs like Peter Schiff hailed this as proof of "Putin's brilliance," but it looks more like Putin's desperation to me. Putin is frantically trying to prop up his lousy economy and keep Russian miners working by buying up gold. Basically, Russia has been trying to shore up the price of gold by buying it.

Cheap Oil = Cheap Gold

The probability of a recession in Russia in the next year is 75%, according to Bloomberg, because of falling oil prices. Bloomberg also noted that around half of Russia's budget comes from oil and gas taxes. If the tax revenues fall, Russia won't have the money to buy gold and could have to start selling at some point, which means gold prices will fall faster.

Those that have been paying attention know that gold prices have collapsed in recent years and dragged gold miners' revenues down with it. As recently as November 30, 2012, gold was trading at $1,726 an ounce; on Nov. 21, 2014, it was trading at $1,203.75 an ounce, or a drop in value of more than $500 in just two years. Now we have to ask ourselves what happens if the Russian gold buying suddenly stops. That, of course, would spell disaster for gold miners, many of which are already in very sorry shape. Many of the top players are already in big trouble if you take a look at their revenue figures.

A Very Vulnerable Industry

The financial numbers show that gold miners are extremely vulnerable to falling gold prices. The frightening revenue figures at the gold companies include the following:

  • Barrick Gold reported a TTM revenue of $13.73 billion in September 2013; by September 30, 2014, that number had fallen to $10.59 billion. A loss of $3.14 billion in just one year.
  • Newmont Mining reported a TTM revenue of $8.7 billion in September 2013; by September 30, 2014, that number had fallen to $7.37 billion-a loss of $1.33 billion in just one year.
  • Goldcorp did a little better; it reported a TTM revenue of $3.803 billion in September 2013 that fell to $3.633 billion in September 2014. That's a loss of around $200 million.
  • Anglogold Ashanti (NYSE: AU) also did better; it reported a TTM revenue of $5.45 billion in September 2013 that fell to $5.411 billion in September 2014.

The revenue figures show us that the big gold miners are already in deep trouble. What happens if Russia stops buying gold and propping up the price or worse if Russia starts dumping gold on the world market in order to make up for revenue short falls.

The likely answer is a collapse in gold prices and even lower revenues at gold miners. Gold is already within $200 of $1,000; just imagine the panic that will hit the gold market if its price falls below $1,000. Those that don't think this is possible should take a look at oil prices.

Putin's Economic Plan Is Not Working

Putin claims that his country is ready for a catastrophic oil slump, but it looks to me as if it may not be. His plan, devised by economic adviser Sergei Glazyev, was based on the assumption that gold prices would go up. They've gone down since the scheme was unveiled in May.

Putin and Glazyev's economic plan is not working; Russia is more vulnerable and economically unstable than before. The whole plan is based on notions of economic sovereignty similar to those that are driving the Swiss Save Our Gold initiative and bizarre monetary policy. Basically, they're trying to return to the gold standard, an economic policy that did not work in the 1920s. Like other true believers, Putin is a gold bug who thinks that his favorite metal is somehow exempt from the market and economic realities.

The economic realities are now hitting home and leaving Mr. Putin in an extremely vulnerable situation. Putin's political power has been built on the use of commodity exports like oil, gas, and gold to prop up the Russian economy and pay for his militaristic fantasies. That, of course, depends upon high oil and gold prices. His shell game of using one inflated commodity to prop up another has been exposed.

Russia's Economy Is Collapsing

The situation is similar to that in the later decades of the Soviet Union, when the Kremlin financed its Communist Empire by selling off Russian commodities. The collapse of commodity prices seriously weakened the Soviet Union. Putin's Russia is in a far weaker and more vulnerable situation because its resources are nothing like those the Soviets could command.

One has to ask how long Putin can stay in power when the Russian people realize that their country is broken and their economy has collapsed. My prediction is that inflation and a collapse of the ruble are imminent. The ruble was trading at 50 to the U.S. dollar on Nov. 28, 2014, meaning that it was worth around 2¢ in U.S. money.

Putin's popularity is based on the absurd fantasy that he can make Russia into a superpower again; when Russians realize their currency is worthless, the charade will end. Worse, Putin's Kremlin, like the Soviets before it, may have to start selling its gold to finance imports such as food.

That will be even worse news for gold miners because Russian gold producers will probably sell off gold at whatever price they can get just to survive. They'll flood the market, and we'll see a glut in gold just as everybody else is selling off the metal.

I for one have to wonder how many of the gold miners will be able to survive the perfect storm that's being unleashed. Judging by the revenues, most of them will not be able to weather the storm that Mr. Putin has created.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.