Gold climbs as global instability continues … would Putin really consider nuclear weapons? … Eric Fry’s subscribers make 100% on an oil trade … Bitcoin jumps as the ruble collapses
The Russian ruble has collapsed.
From Time:
The ruble plunged to a record low of less than 1 U.S. cent in value Monday after Russia was cut off from the global bank payments system in retaliation for Moscow’s invasion of Ukraine.
Restrictions on Russia’s central bank’s more than $600 billion in reserves have limited the Kremlin’s ability to prop up the ruble.
In response, the Russian central bank has turned, in part, to gold.
From NPR:
Former Treasury Department officials and sanctions experts expect Russia to try to mitigate the impact of the financial penalties by relying on energy sales and leaning on the country’s reserves in gold and Chinese currency.
Gold’s price has been creeping higher in recent days. Since our last Digest that focused on gold one week ago, the yellow metal has climbed from just above $1,900 an ounce to $1,943 an ounce yesterday. As I write on Wednesday, it’s pulling back to $1,920 as investors return to “buying the dip” in stocks.
We suggested more significant gains from gold were appearing likely. It turns out, we’re not the only ones who believe this.
From Kitco:
Gold is another safe-haven commodity that is due for a much bigger rally going forward, according to Goldman (Sachs).
“The recent escalation with Russia creates clear stagflationary risks to the broader economy, driven by higher energy prices, which reinforce our conviction in higher gold prices in coming months and our $2,150/toz (troy ounce) price target,” Goldman said.
If gold climbs to $2,150 an ounce, that would mean a gain of about 12%. Now, no one is going to turn down a 12% gain, but that’s hardly an explosive move.
But we continue to suggest owning at least some gold for a different reason than big gains.
***Vladimir Putin feeling angry, isolated, and embarrassed is not what we want
Gold is fundamentally a defensive asset, not offensive.
And if you study history’s greatest traders and investors, you find a common theme – protect your capital.
Wildy successful investors have what borders on an obsession with focusing on what could go wrong in a trade and protecting against that outcome – far more than analyzing how the trade could go right.
So, what could go wrong with Putin and his Ukrainian invasion?
Actually, let me rephrase – what is currently going wrong with Putin’s Ukrainian invasion?
From NBC:
U.S. intelligence agencies have determined that Russian President Vladimir Putin is growing increasingly frustrated by his military struggles in Ukraine and may see his only option as doubling down on violence, current and former U.S. officials briefed on the matter told NBC News.
As the Russian economy teeters under unprecedented global sanctions and his purportedly superior military force appears bogged down, Putin has lashed out in anger at underlings, even as he remains largely isolated from the Kremlin in part because of concerns about Covid, the sources said.
Today, we have a united front of global leadership standing firm against Putin’s aggression… fierce resistance from the Ukrainians, thwarting his attacks… and a barrage of sanctions that are inflicting massive damage to the Russian economy, hurting Putin’s ability to wage war.
The hope is this will result in Putin eventually realizing the futility of his efforts and throwing in the towel. And we certainly hope that’s the case.
But what if it’s not?
Let’s say Putin feels increasingly backed into a corner. He’s embarrassed that Ukraine hasn’t fallen as easily as anticipated. Meanwhile, the Russian economy is in freefall, with the ruble collapsing.
And perhaps most dangerous with a megalomanic, Putin’s vision of going into the history books as the leader who returned Russia to former glory appears tenuous at best.
Why wouldn’t Putin double-down on his aggression? From his perspective, what’s to lose?
***Last week, Putin made veiled references to nuclear weapons
The comments were generally dismissed by political commentors as saber-rattling.
But in the same way that the most successful investors focus on what could go wrong, we’d be wise to at least consider Putin’s threats more seriously.
From Fiona Hill, a U.S. national security official and a longtime Putin expert:
There’s evident visceral emotion in things that (Putin) said in the past few weeks justifying the war in Ukraine. (This) visceral emotion is unhealthy and extraordinarily dangerous because there are few checks and balances around Putin.
The thing about Putin is, if he has an instrument, he wants to use it. So if anybody thinks that Putin wouldn’t use something that he’s got that is unusual and cruel, think again.
Every time you think, ‘No, he wouldn’t, would he?’ Well, yes, he would. And he wants us to know that, of course.
It’s not that we should be intimidated and scared. That’s exactly what he wants us to be.
We have to prepare for those contingencies and figure out what is it that we’re going to do to head them off.
The kneejerk reaction is that Putin wouldn’t use a nuclear weapon because he’d be immediately blasted to smithereens by a return strike.
But that line of thinking is based on images of a nuclear explosion similar to Hiroshima or Nagasaki – highly unlikely. Instead, Putin could use what are called “tactical nuclear weapons.”
From Britannica:
Less powerful than strategic nuclear weapons, tactical nuclear weapons are intended to devastate enemy targets in a specific area without causing widespread destruction and radioactive fallout.
If such a weapon was used, certainly there would be a retaliatory strike by western countries with their own tactical nukes. This could lead to a rapid escalation in the violence, potentially leading to something far more dangerous.
This is not an outcome the market is seriously considering at present. As such, were it to happen, the selloff would likely be intense.
***I believe this outcome is unlikely, but statistically, so too is a tree falling on your house, yet you buy home insurance anyway
For thousands of years, gold has been “wealth insurance” during times of economic trouble.
On this note, let’s turn to our macro expert, Eric Fry:
Every Intelligent Asset Allocation strategy must include a commitment to what I call Wealth Insurance.
You need a “policy” that protects your wealth during bear markets and other periods of turmoil.
And when it comes to surviving a bear market, no other “insurance policy” is like gold.
Like most insurance policies, gold just “sits there” most of the time. It doesn’t do much of anything. This apparent shortcoming is actually its supreme virtue.
It just sits there… until you need it to do something.
And the funny thing about gold is that it usually starts to “do something” at the precise moment when most investors have given it up for dead.
If you’re looking for the simplest way to add some gold to your portfolio, GLD is the SPDR Gold Shares ETF. It tracks gold’s price.
Again, you don’t buy this to make a boatload of money. You buy it to help offset the potential for a boatload of losses.
***Before we sign off, a quick “congratulations” to Eric Fry’s Speculator subscribers
Regular Digest readers know that Eric has been a proponent of the oil trade for months.
Yesterday, he recommended to his Speculator subscribers that they lock in a 100% gain on a half-portion of their trade on XOP, which is the SPDR S&P Oil & Gas Exploration & Production ETF.
From Eric:
I suspect this winning oil trade has a lot more room to run, but to err on the side of caution, I’m recommending that you sell half the position today.
By the way, don’t miss Eric’s hat-tip to “caution.” In the same way that “focusing on what can go wrong in a trade” is an obsession for the world’s greatest traders, Eric is approaching even his gains with a defensive mindset.
Again, congrats to Speculator subscribers on a great trade. We’ll be watching to see how the other half plays out.
***Actually, one final note before we end today…
We’re running long, so we’ll dive into this topic in more detail in a coming Digest, but keep an eye on Bitcoin in the coming days.
It might not be an inflation hedge anymore, but it’s appearing it might be a chaos hedge, similar to gold.
From Yahoo! Finance:
Bitcoin rocketed by over 5% on Tuesday, even as risk aversion drove down blue-chip and technology shares that cryptocurrencies have been linked to for weeks, as markets digested new developments in Russia’s ongoing invasion of Ukraine.
… volume for trading Bitcoin and stablecoins like Tether (USDT-USD) jumped in the last several days within Ukrainian and Russian markets, as the Ruble tumbled in global markets to mere pennies on the U.S. dollar…
…the move to sanction Moscow – including shutting Russia out of the SWIFT global financial system – appears to have triggered a sentiment shift in favor of crypto.
Among some crypto investors, a theme has emerged arguing a government-led financial crackdown is boosting the advantages of the more decentralized digital token sector.
Who would have guessed?
By the way, our two crypto experts, Luke Lango and Charlie Shrem, just sat down together on Charlie’s podcast, Untold Stories. They discussed a range of subjects, covering Bitcoin, the Fed, the #1 thing Luke looks for in a crypto, and far more. Click here to check it out.
Have a good evening,
Jeff Remsburg
