How Gold, Precious Metals Could Gain from Turmoil in Ukraine

Primed to capitalize on investor concerns regarding the ongoing crisis in Eastern Europe, Gold and other precious metals have already started posting gains in May. Continued fallout, both in the region and globally, could serve to only increase the interest in these commodities as a safe-haven. Even before events escalated in Ukraine during the early months of this year, economic conditions had stagnated in Eastern Europe. Now, with the country sliding closer to civil war and the relationship between Russia and the West degenerating, markets are beginning to hedge themselves. Russia has been experiencing chronically high inflation, prompting recent interest rate hikes from its central bank; foreign capital has been fleeing the region; the Ukrainian government is severely indebted and, without outside help, seems headed towards default; global supplies of Russian oil and Ukrainian grains are being threatened; European officials are calling for more stimulus spending; reactions from Moscow over US sanctions are only adding to fears of the two world powers may end up in a trade war. What does this mean for gold moving forward? Precious metals are one of several traditional benefactors from looming economic uncertainty; however, other historically viable options – like government bonds – may already be tapped out (as has been previously discussed here). We dig a little further into some of reasons that turmoil in Ukraine could lead to a rally in gold.

Foreign capital accounted for up to 40% of all banking funds in Ukraine during 2013. Since protests first began in December and January, those funds have dropped by over 30% already. Banks and investors alike are running from the region over security risks and the prospects of low returns. The largest lender in Ukraine, Privatbank, had been forced to temporarily halt its operations in the cities of Donetsk and Luhansk earlier this year. The Russian state-owned Sberbank had to take similar actions just this month. Both the IMF and the Obama Administration have already indicated they would be willing to provide relief in order to stabilize conditions. Worsening conditions in Ukraine certainly aren’t going to spur governments to spend less money. Monetary uncertainty in the East, combined with threats to important trade resources, could adversely impact other European and global markets as well.

One of the least-discussed underlying concerns with the ongoing crisis involves Russian oil production. Ukraine acts as a crucial pipeline for oil to the rest of Europe; Russia supplies somewhere between 25-33% of the total Euro zone supply, and Ukrainian pipelines are responsible for pumping nearly half of that number. Europe is already struggling to hold on to a weak recovery and can ill afford a disruption in the oil markets (not that the rest of the world would be stoked, either). On top of that, Ukrainian production of corn and wheat is among the highest in the world. These prices are very important to economies that rely heavily on grain imports to provide access to cheap food. Trouble with either commodity would increase worries about another recession. Tension is also adding to concerns about an already-weak Russian economy. Russian equity markets reached a four-year low in March. Russian consumers rely heavily on foreign imports and their standard of living is being threatened by potential trade war. The United States, Japan and Canada have already imposed economic sanctions against certain wealthy Russians and Russian businesses. The Obama Administration has also called for investors to sell Russian stocks. Russian officials have stated that such actions will only serve to hinder peace talks in the region. With conditions as they currently are, the European Bank for Reconstruction and Development has projected less than 1% growth for Russia this year, putting pressure on its government to increase stimulus spending. This is good news for gold, if not necessarily good news for the Russian people.

The European Central Bank (ECB) has not raised interest rates from 0.25%. The IMF has called for the ECB to increase stimulus spending, targeting even higher levels of inflation as the European recovery teeters. Christine Lagarde, head of the IMF, warned that that lower inflation rates would pose a serious threat to European recovery. Gold is a natural hedge against inflation, recession and uncertainty, due to a combination of high demand and fixed supply. Many central banks around the world will increase their gold purchases to back up their assets during economic difficulty.

Central banks tend to hoard gold during times of economic turmoil.

Gold futures have traded higher in recent days, moving towards a season high of $1,303.90 per ounce (as this sentence is being written, futures had reached $1,297.30) – this following news of Pro-Russian separatists in Ukraine winning a referendum in favor of self-rule. Chintan Karnani, market analyst at Insignia Consultants in New Delhi, sees opportunity for gold investors, saying that there is no doubt that “Ukraine is supporting gold prices now.” July numbers for silver and copper are up as well, both rising more than 2% over the same time period. Growing uncertainty in the global economy, magnified by the events in Ukraine, give plenty of reason to keep an eye on gold in the near future. If you need information about how gold or other precious metals might help your 401K, Gold-401K.org has a free information kit available right now. Request yours today!