News Roundup week # 3: Russia squeezed, buy Gold NOW??

February 28, 2022

Table of Contents

In our latest review of some of the major financial stories from last week, we look at how markets have shrugged off the Russian invasion and whether now is a good time to invest in gold.

1. Market’s shrug off Putin’s invasion

When Putin started his invasion of Ukraine, the markets tanked but quickly recovered.

Investors realized the sanctions, while detrimental to Russian interests, made a point to leave the Russian energy sector largely untouched.

This strong rebound follows weeks of downward market movement in anticipation of the current conflict. [1]

Typically, when fear grips the markets in anticipation of an event like this, the journey to the event often proves more painful on the markets than the event itself.

Partly encouraged by the resilience of major financial markets, the West added to their sanctions by deciding to cut some Russian banks from the SWIFT network. [2]

SWIFT, or the “Society for Worldwide Interbank Financial Telecommunication”, is a network used by banks to send secure messages about transfers of money and other transactions.

More than 11,000 financial institutions in nearly 200 countries use SWIFT, with more than half of Russia’s financial institutions being members of SWIFT. [3]

If not engineered well, the impact of cutting Russia off from SWIFT would be especially costly for both Russia and Europe, which receives 41% of its natural gas needs from Russia.

While it remains to be seen how the markets react to this news, my hunch is that the Russian banks that are to be cut off from SWIFT are selected in a way that chokes Russia out financially without hurting the west’s interests in accessing Russian oil and gas and, thereby keeping energy prices under control.

We are only a few days into the invasion, but it seems that the economic impact of Russia’s invasion and the sanctions imposed as a result will be limited to a modest increase in inflation.

Events in Ukraine seem to confirm what I’ve thought all along about Russia’s military which is that it is massively overrated. Since the start of their aggression, the Russian’s progress has been rather underwhelming.

After its loss in Ukraine, which I think is inevitable at this point regardless of how long it takes or the extent of the human suffering Putin’s military causes the Ukrainian population, Russia’s ability to intimidate will be dramatically impaired which is fundamentally a good thing for humanity in general and Muslim populations in Russia’s orbit in particular.

The second topic from this week’s rundown is the one that got the most likes from our community when I asked them which topics they’d like me to address and this topic is:

2. Is now a good time to buy Gold?

While the rest of asset prices were falling, Gold rose about 6% in the last 30 days reaching close to a high of $2,000/oz. This is consistent with gold being a risk-off asset that people flee to whenever panic sets in the markets.

So is it a good investment now?

If you have Gold long-term as part of your portfolio then this makes sense but if you’re looking to park your finances somewhere for the next 3 to 6 months I don’t think so.

Investing is about buying low and selling high

Right now, Gold is near the highest it’s been in 20 years. I prefer to buy the assets that have fallen out of favor but think will be eventually rotated to.

Therefore, Buying Gold makes more sense to me when greed is at an all-time high, not fear. This way I’m always one step ahead of the market which is where you want to be as an investor.

When Russia invaded Ukraine in 2014, Gold touched $1,350/oz for the first time since October 2013.[4] During the next 6 months it dropped 15% to reach $1,100/oz.

Price of gold in 2014 when Russia invaded Ukraine

It remains to be seen if gold prices will follow the same pattern as it did after the Crimea takeover. Admittedly, this time around the conflict seems much more dire.

However, while history doesn’t always repeat itself it does tend to rhyme.