Gold Bears Jump on the Ruble Crisis – Weakness Hits ETFs

The ruble crisis is giving gold bears more reason to speculate.

Bullion.Directory precious metals analysis 18 December, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

The world was expecting Russian leader Vladimir Putin to flinch in today’s press conference in the wake of a weakening economy and deflated value in the ruble.

In typical fashion, Putin showed his tough-as-nails KGB exterior by not flinching. In fact, Putin mentioned the economy could remain weak for two years but avoid a crisis. There is even talk that Russia’s new buddy, China, could extend financial support.

You have to give Putin some praise for the ability to receive respect of his countrymen and women in the face of a rocky economic climate.

Putin said that the tough times were due to the West, and this is “payment” for the annexation of Crimea. Partly, this is true. However, the Russian economy was weakening going into the crisis.

The vast drop in Brent oil gave way to further speculation and the ruble paid the price. This crisis in the ruble spread into the gold markets where gold bears outright expect Russia to sell portions of its gold reserves to raise cash, thus defending the ruble from further weakening.

Unfortunately, this is unlikely. Russia is not out of hot water, but they have enough reserves to cover sovereign debt obligations but not corporate debt.

Before gold stores are liquidated, Russia will more than likely receive aid from its partners, including China. Russia has accumulated large amounts of gold this year, and it is not, particularly, feasible that they would liquidate so soon. On the other hand, Russia has a tendency to foreshadow these events. Leading up to the “invasion” of Crimea, Russia off-loaded a large amount of US treasuries expecting retaliation from the West would occur.

Nevertheless, the speculation leaked into the gold market.

Spot prices have bounced between the low $1,180s and $1,215 per toz., and the iShares Gold Trust (GLD) saw prices fall more than $3 per share since since Friday. Gold investors should not pay attention to the near-term volatility in the GLD. The gold-backed ETF is largely held by hedge funds and institutions (whereas the iShares Silver Trust (SLV) is held largely by retail investors).

And these hedge funds are too short-sided and will almost always reveal their bearish outlook on the yellow metal.

The ruble has come off the lows and created roughly a 50 percent retrace from the all-time high.

The GLD represents gold priced in dollars, but we have seen gold values priced in euros, pounds, and yen see highly respectable gains this year amid the currency race to the bottom. In ruble-terms, gold has seen a 60 percent gains… in December! It goes to show you how valuable gold is in today’s financial system.

Gold in dollar-terms may meander, but yesterday’s ever-dovish FOMC statement indicates the Fed has no idea what they plan to do.

The strengthening dollar has become an issue because it is capping consumer prices. Expect the Fed to weaken the dollar in the coming year.

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