Tags: Ukraine | US | gold | Russia

He Who Has Patience Can Have What He Will

Tuesday, 15 April 2014 01:16 PM Current | Bio | Archive

Ukrainian Acting President Oleksandr Turchynov said Tuesday at the Ukrainian parliament that an anti-terrorist operation had begun in Eastern Ukraine in the north of the Donetsk oblast area aiming to restore control of the cities that are commandeered by pro-Russian forces.

Also Tuesday, Russian permanent representative at the European Union, Vladimir Chizhov, noted that developments in Ukraine during the next hours and days will determine whether there will be anything to discuss with the acting foreign minister of Ukraine at the planned four-party meeting among the Ukraine, Russia, the United States and the European Union in Geneva on April 17.

He added that if the situation in Ukraine grows into massive bloodshed there would be nothing to discuss. Let's hope it doesn't come to that and the four-party meeting takes place and all participants really talk to each other and not at each other.

That said, so far, we haven't really seen risk-off moves in the markets, which instead have remained complacent despite what's going on in the Ukraine and what it could imply during the short to median term.

In this context, it's maybe good to mention that German Minister of Finance Wolfgang Schauble warned the biggest geopolitical risk to the economy overall is the current situation in Ukraine.

History teaches us that markets usually have a tendency not to take into account geopolitical risks. I must admit this is extremely difficult to do, but, I'd like also to put the actual evolving Ukrainian situation this way: If, and that's a big "if," we should get any form of a so-called 'Ukrainian contagion,' which should mean that Russia enters into other regions beyond the Ukraine it will be 'fasten your seatbelts.' Unfortunately, I don't think is an overstatement.

At the time of this writing, the dollar has strengthened somewhat against most of the major currencies — the euro has dipped below the $1.38 handle. But what might be somewhat unexpected to some long-term investors is that gold, silver, platinum and palladium are all lower by more than 1 percent, while copper is about half of a percent lower.

But, and this is also a big "but," as a long-term investor it might be helpful remembering the curious (generally unexpected) behavior of the gold price when we had in the 1970s and 1980s heightened military tensions between the nuclear powers of the |Soviet Union and the United States. Maybe this time isn't that different from what we saw then.

When in 1973 during the build-up to the Yom Kippur war and tensions between the United States and Russia mounted and when the United States moved to DEFCON 3 on Oct. 25 while the Soviets placed seven airborne divisions on alert in response, we saw gold come under substantial pressure with losses of about 15 percent continuing to build through late October and November.

Then, when Ronald Regan became president in 1981, which coincided with an 18-month downtrend that saw gold lose about half of its value, although some attribute this downward move to Federal Reserve Chairman Paul Volker's efforts for ending the high levels of inflation, it marked the start of the second Cold War, which also saw a sharp increase in military spending and rising nuclear tensions in Europe.

Gold prices started moving down on Feb. 11, 2013, which coincided with the news that North Korea had vowed more long-range rocket tests and also came just hours ahead of a North Korean nuclear test. Later that month, we saw further important declines that resulted in a total decline of about 9 percent when North Korea threatened South Korea with "final destruction" during a debate at the U.N. Conference on Disarmament. Interestingly, when the news flow from North Korea began to slow down in late February, the gold price regained some of its losses.

Finally, when then on April 2 we got the news North Korea was reactivating its Yongbyon nuclear complex, which would allow it to create both plutonium and highly enriched uranium for its nuclear weapons program, gold came under renewed pressure as military tensions rose, with each fresh (negative) news event causing gold to move further down. By April 16, gold had lost about 18 percent of its value from where it stood when we got the first news in February of the long-range rocket tests.

To put this somewhat into context this was almost exactly the same scale of losses in the gold price that emerged during the two months after then-Fed Chairman Ben Bernanke stated on May 10 at the 49th Annual Conference on Bank Structure and Competition: "In light of the current low interest rate environment, we are watching particularly closely for instances of 'reaching for yield' and other forms of excessive risk taking."

Taking all the above into account, in these uncertain times, which could rapidly become dangerous, and as a long-term investor, I certainly wouldn't accumulate gold right now trying to shield in part what I have, but instead, I would prefer to take my time and wait until the dust of the storm settles and the gold price finds its "peace-inspired" plateau.

Believe me, that will be easier said than done, but I think it's certainly worth trying.

As Benjamin Franklin said: "He that can have patience can have what he will."

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In these uncertain times, which could rapidly become dangerous, and as a long-term investor, I certainly wouldn't accumulate gold right now trying to shield in part what I have.
Ukraine, US, gold, Russia
Tuesday, 15 April 2014 01:16 PM
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