I’m not sure why the West is surprised at President Putin’s ‘invasion’ of Crimea in Ukraine and the potential for further incursions by Russian troops and/or Russian-backed militia in the east of the country which is largely Russian-speaking and pro-Russian.
The exertion of control over Crimea was wholly predictable and has similarities with the Russian ‘invasion’ of South Ossetia and Abkazia in Georgia in 2008 when internal dissension looked like marginalising Russian speaking pro-Russian areas of that country.
The similarities with the latest ‘invasion’ of Crimea are strong – indeed the grounds for trying to annex Crimea permanently into the Russian state may be even stronger given its strategic importance and it being the location for the main Russian Black sea naval base.
And Western rhetoric describing the government change in Ukraine as democratic also doesn’t seem to stand up given perhaps half the country seems to be against the change and it has not yet been put to the test of a national vote.
However, it is apparent that even many of the pro-Russian sector are perhaps also unhappy with the former regime of President Yanukovych which could lead to some grounds for negotiation between the two main Ukrainian factions. But Russian involvement, with President Putin being notoriously hard line in his views, and with past history of outmanoeuvring the West over Georgia and Syria, was almost entirely predictable – and with no stomach for military intervention the West is perhaps hamstrung by the Putin move to put troops into the sovereign nation of Ukraine to ‘protect’ the ethnic Russian community.
Pressure will be put on President Putin, including diplomatic and perhaps economic sanctions, but these may have limited effect, and will be unlikely to harm President Putin’s internal status – indeed may enhance it although they could have an impact on a fragile Russian economy. Russia too can retaliate economically given that it is the primary supplier of natural gas to most of Europe, including the UK and while cutting off gas supplies can damage the Russian economy further in the short term, it can do far more lasting damage to Europe given the latter is still struggling to recover from deep recession.
So it seems that Russia may hold many of the trump cards. One suspects that a diplomatic solution will be engineered with President Putin revelling in the role of statesman, but this may involve huge concessions to Russia including perhaps the effective annexation of Crimea, already a semi-autonomous region – albeit under some form of semi-independent status still officially within Ukraine, but effectively under Russian control.
Although Ukraine has a very big army, it is reported to have been hugely underfunded by the Yanukovych regime and is thus undoubtedly technologically hugely inferior to the Russian military machine. Its troops will also have divided loyalties given the big ethnic divide in the nation with about 30% of the population Russian speakers.
So where does this leave gold? Does it have any impact? Gold does tend to thrive on uncertainty so the recent run-up in the gold price will have incorporated a significant Ukrainian factor, but once some kind of settlement is reached – probably sooner rather than later – the world may breathe a sigh of relief and mark gold down accordingly. Indeed a small de-escalation of the situation this morning saw gold plunge $10 from an overnight level of around the $1250 mark. The only question is perhaps if by the time a solution is finally engineered whether gold has reached a self-sustaining upwards momentum which could negate, or mitigate, the likely potential fall.
And there are plenty of factors out there which could help gold retain its safe haven status even should Ukrainian tensions ease dramatically. Perhaps most important in western markets is whether the U.S economy is still vulnerable. If, for example, the U.S. Fed taper is itself tapered because unemployment remains stubbornly high and the economy is not seen as recovering fast enough for tapering of the bond buying programme to be halted yet, which is a definite possibility if employment statistics remain at levels seen in December and January and other growth factors are not prevalent in the plethora of massaged statistics produced each month. This would send a strong signal that the recent stock market growth has to be vulnerable and may push more investors back into gold.
We have commented here before on the big impact any turnaround in the gold ETF figures could have with inflows replacing sales, as has been seen in the past month, and there is the continuing impact of Asian gold buying soaking up all newly mined gold output, and more, with China leading the way, and the statistics from the latter may have an undue impact as the likely perception will be that imports are slipping! January and February tend to be weakish months for Chinese gold imports due to the impact of the Chinese New Year holiday which shuts down businesses for the best part of two weeks. While this may not impact buying, it will likely affect imports. The January Hong Kong import figures did indeed show a decline from December but, as we pointed out, there should be encouragement for the gold followers in that the January figures were actually enormously in excess of those for January the previous year.
Because of the New Year holiday we would not be surprised to see a further fall in announced gold imports in February – but again these were also relatively low in February 2012 prior to a huge restocking boost in March. (Although researcher Koos Jansen suggests a 51% overall increase in Chinese consumption figures so far this year on his In Gold we Trust website which could mean February figures come in at a reasonable level).
We publish the table below to give an idea of the flow pattern in gold imports into China through Hong Kong last year and which emphasises the big January increase year on year.
Table: Chinese gold imports via Hong Kong (tonnes)
2013 Net imports (tonnes)
2014 Net imports (tonnes)
84 to date
The big question taxing Western gold analysts is whether China’s 2013 consumption levels can be maintained in the current year given the gold price is currently well above its late 2013 lows. There are some indications in the reduction of Shanghai Gold Exchange premiums that it may indeed be slowing a little, but we really won’t know until we have a few more months of statistics behind us, although the published ones may themselves be a little misleading given the ones the Western media seem to rely on are those through a single port of entry – Hong Kong. Although this may be the main entry point for much of China’s gold it is not the only point, which is why SGE statistics, as followed by Koos Jansen, suggest much higher levels. Indeed Swiss gold exports, a primary route for western physical gold into Asia, do separate out Hong Kong and Other China confirming other direct entry points. And undoubtedly Swiss re–melted gold is not the only source of gold imports into the nation.
So, while the continuing uncertainty around the Ukrainian political situation, and Russia’s intentions, has been giving the gold price an additional fillip, don’t necessarily expect this to continue. There may be a few more ups and downs resulting with tensions continuing over Crimea, but there are indications that President Putin may already be pulling back from the brink which could pave the way for negotiations – albeit on Russian terms and there may not be a whole lot the West can do about it.
But Ukraine and Crimea may prove to be a storm in a teacup as far as gold is concerned. It is probably the U.S. economy, and China which will hold the key to gold’s path in the ensuing months.
This article appears courtesy of Mine Web. To read more daily international mining and finance news click here.