Betting On The Russian Black Swan

Includes: GLD, IAU
by: Elena Shevtsova


Russia could be the next black swan. A volatile ruble and Western sanctions could push Russia to adopt the gold standard.

How to benefit from the black swan? Investing in gold through the purchase of ETFs, gold mining stocks, and physical gold might be a viable solution.

Another strategy to benefit from the black swan involves using derivatives.

Russia's economy is not in great shape. The ruble is volatile, despite Moscow's massive interest rate hike on December 15, 2014. Indeed, the Russian currency has since dropped as much as 16.5% against the US dollar. On January 30, 2015, the Central Bank made yet another bold move: it reduced the official interest rate from 17% to 15%. The Russian ruble's fall halted, but the currency remained volatile.

At that point, one would expect the Central Bank of Russia to sell its gold reserves in order to shore up the Russian ruble. However, Russia is doing just the opposite.

Why is Russia accumulating gold? The fact that Russia is buying record amounts of gold (see chart below) leads one to question whether Russia has a new plan to save the economy.

Source: Bloomberg L.P.

As controversial as it might sound, Russia may be purchasing gold in preparation for the adoption of the gold standard. Russia could be yet another black swan, using the term, popularized by Nassim Nicholas Taleb. Experts would not normally predict that such an event could happen because it appears at the far end of the probability tail.

Why would Russia adopt a gold standard? Some experts believe that Russia could back up the ruble with gold. Such a move would bolster the volatile ruble and boost investor confidence. Moreover, it would lead to the appreciation of the Russian ruble against the US dollar.

How could investors benefit from the black swan? Investing in gold through ETFs (GLD, IAU) or gold mining stocks (ABX, AUY, NEM) could prove to be quite beneficial. Moreover, Asian investors could buy physical gold through banks (NYSE:C) while US investors could buy American Eagles produced by the United States Mint.

Russia's adoption of the gold standard could have a limited impact on global gold prices. Russia is only the world's fifth largest buyer of gold. It would be difficult for Russia alone to push gold prices up substantially. However, India and China, the world's largest buyers of gold, could join hands with Russia and adopt the gold standard, thereby providing a substantial boost to the gold demand. As a result, gold prices would increase. In this scenario, investors could benefit from taking a long position in ETFs (IAU, GLD) or gold mining stocks (ABX, AUY, NEM).

Another beneficial strategy is more aggressive and risky. However, investors know that the best time to buy often is when others are too scared. The recent collapse of the Russian currency could present a unique opportunity for discerning investors to buy the Russian ruble at bargain prices.

Here is why this concept is not as daunting as it seems. Instead of investing in the Russian ruble directly, one could consider the alternative-buying options. This type of investment is much less risky. If a black swan event does not occur, the loss will be limited to the premium paid for the long call option. At the same time, there would still be unlimited profit potential for the long call option strategy.

Black swans are rare, but high impact events. We all remember the US subprime mortgage crisis and the collapse of Lehman Brothers. Russia's adoption of the gold standard could be yet another black swan. Despite the risk, there is a chance for investors to benefit from the event, using derivatives. These financial instruments will allow one to lose a small amount on the premium paid and to profit handsomely when the black swan occurs.

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. The author has no business relationship with any company whose stock is mentioned in this article.