The citizens of Crimea have spoken, and an overwhelming majority of voters (over 93%, as reported by Zerohedge.com) have voted to formally apply to join Russia. What’s more impressive is that nearly 80% of the citizens turned out to vote, which is a higher turnout than any U.S. presidential election since 1900. Despite the vote, Russian troops and tanks are preparing for possible conflict. Not surprisingly, the vote has been rejected by the US, EU and the UK as being illegitimate, which they claim is contrary to international law. Considering the controversial vote and the differing opinions on the Ukraine crisis, the financial markets and commodities markets are likely to be active over the coming week. Below are a few possible scenarios that we could see playing out over the next few days and weeks.
The precious metal markets have been one of the few beneficiaries of the Ukrainian crisis, with gold prices currently at levels not seen in over six months. There has been a substantial amount of rhetoric, positioning, and threats of economic and political sanctions. Vladimir Putin has largely rejected the threats from the other G8 nations and has continued to support Crimea’s separation from the Ukraine, claiming that he is willing to respect the decision made by the citizens of Crimea. However, he has also publicly stated that he is willing to use military force to protect the interests and safety of “Russian compatriots.” Furthermore, Russia has allegedly responded to possible economic sanctions by threatening to sell their holdings of U.S. Treasuries (totaling over $200 billion), which could potentially cause the U.S. financial markets to collapse.
Thus far it has been a political standoff between the members of NATO and Russia without bloodshed. However, if NATO forces move in and militarily support their position that the Crimea referendum is unconstitutional, we could potentially see a military conflict with Russia, which could cause gold prices to soar. We’ve discussed factors that affect the price of gold in a previous piece, but the threat of war is a factor that is oftentimes overlooked by precious metal investors. While the likelihood of World War III erupting from the Crimea referendum vote is highly unlikely, it’s possible that we could see military engagement in the region and a number of sanctions levied against Russia, which could impact global trade. Furthermore, retaliation from Russia is likely, and the possibility of the Russian government selling their Treasury holdings in an attempt to sink the U.S. economy is not out of the realm of possibility.
The above possible scenarios could spell trouble for the global economy; causing global stock markets to tank and Treasury rates soar, but precious metals, and in particular, gold, would likely benefit from any military involvement and/or economic sanctions, as it has historically been viewed as a safe haven investment. While Treasuries have also historically been viewed as a safe harbor during periods of economic crises or uncertainty, they may not be one of the favored investment classes if Russia sells their Treasuries, causing bond rates to spike. Furthermore, China, who is a close trading partner of Russia, and the second largest holder of U.S. treasuries in the world, could follow suit, further exacerbating a potential financial crisis.
In this writer’s opinion, Crimea’s vote on Sunday to join Russia will likely prolong potential military involvement and the threat of various sanctions, as Putin previously stated that he would abide by the wishes of the citizens of Crimea. This continued tension should help to support the current price of gold, and possibly cause it to move higher. While gold and silver have been two of the top performing asset classes this year, we could see both moving higher in the short term, possibly breaking the $1,400 and $22 an ounce levels, respectively, continuing the impressive rally that we’ve seen so far in 2014.
In summary, Crimea’s vote to join Russia is being rejected by major G8 nations, including the US, UK and most of Europe. If these nations continue to view Sunday’s vote as unconstitutional, we could potentially see military conflict in the region, sanctions imposed against Russia, and in turn retaliation from Russia. If tensions continue, we would expect for the price of gold and silver to be beneficiaries and approach or exceed key levels of $1,400 an ounce and $22 an ounce, respectively. Hopefully for everyone’s sake, the Ukrainian conflict will be resolved without bloodshed, but to protect yourself and your portfolio, a move into gold and silver at this time may be prudent.
This article was written by Tony Davis of Atlanta Gold and Coin Buyers (http://www.atlantagoldandcoin.com)