Month: March 2022

Via SchiffGold.com,

As the ruble collapsed under the strain of economic sanctions after Russia invaded Ukraine, the Russian people turned to gold to protect their wealth.

Russians went on a gold-buying spree in the first couple of weeks after the invasion.
Sberbank ranks as Russia’s largest financial institution. It reported the demand for gold quadrupled during the first two weeks of March. Demand from the Russian citizenry was so strong, the  Central Bank of Russia suspended its gold purchases from local banks so they could leave inventory for their customers.

Demand for silver, platinum and platinum were also strong.

On March 9, President Putin suspended the 20% VAT tax on precious metals. The move was designed to encourage people to buy gold instead of foreign currencies as the ruble collapsed.

“Currently, households’ demand for buying physical gold in bars has increased, driven, in particular, by the abolition of value-added tax on these operations,” the Central Bank of Russia said in a statement earlier this month.

According to Russian media, Sberbank Borrow and Save Division Director Sergei Shirokov said the bank’s clients are trying to protect their savings.

Precious metals are a traditional defensive asset that helps to feel confident in any economic situation. At the moment, our clients want to receive a physical guarantee of the safety of their savings, and bullion is an excellent tool for this.”

The Russian Ministry of Finance called gold an “ideal alternative” to the US dollar.

After pausing during the COVID-19 pandemic, the Central Bank of Russia resumed gold purchases in early March before suspending them again a couple of weeks later. The Russian central bank resumed buying gold from local banks on Monday (March 28) at a fixed price of 5,000 roubles ($52) per gram. This is about $16 below market value. In effect, this puts the ruble on a gold standard.

The country has the fifth-largest gold reserves in the world. Before ending its purchase program at the onset of the COVID pandemic, Russia was the biggest central bank buyer of gold. The Central Bank of Russia bought $4.3 billion worth of the yellow metal between June 2019 and June 2020. And the Russians were buying gold long before that. The Central Bank of Russia bought gold every month from March 2015. According to Bloomberg, “Russia spent more than $40 billion building a war chest of gold over the past five years, making it the world’s biggest buyer.”

Sanctions have locked down Russia’s gold reserves. Last week, the US made it clear any transactions involving the Central Bank of Russia’s gold stash are covered under existing sanctions.

“US persons, including gold dealers, distributors, wholesalers, buyers, individual traders, refineries, and financial institutions, are generally prohibited from engaging in or facilitating prohibited transactions, including gold-related transactions in which blocked persons have an interest.”

Other countries have followed suit.

As Reuters reports, Japan will ban the shipment to Russia of precious metals, especially gold, in response to its invasion of Ukraine, the Ministry of Finance said on Tuesday.

The ban on Russia-bound precious metal reflects Prime Minister Fumio Kishida’s resolve to impose further sanctions against the country, pledged at last week’s meeting of leaders from the Group of Seven (G7) advanced nations.

Specifically, from April 5, Japan will ban the export of precious metals such as gold as well as other items including luxury cars, jewellery, cosmetics and liquor. Japan’s move comes after the United States and Britain took steps to curtail transactions in gold with Russia.

But a lot of analysts think it will be difficult to stop Russia from using its gold in practice. Gold Newsletter editor Brien Lundin told Marketwatch a lot of government officials don’t seem to understand gold.

Any sanctions on Russia’s gold reserves would do little more than reveal the degree to which government bureaucrats don’t understand gold. The beauty of gold, unlike currencies, is that it is an untrackable store of value that has no counterparty.

He also said Russia can easily sell small amounts of gold on the open market.

“In bulk quantities, it could just as easily sell the gold to China with no record of the transaction,” Lundin said, noting that China has demonstrated that it is an “eager buyer of gold.”

After two mediocre auctions to start the week, when in a $101 billion supply doubleheader the Treasury auctioned off both 2Y and 5Y paper on Monday, moments ago Janet Yellen concluded the final auction for the quarter, when the US sold $47 billion in 7 Year paper in another subpar sale.

The auction stopped at high yield of 2.499%, up 59 bps from February and the highest since February 2019. It also tailed the When Issued 2.486 by 1.3bps.

On the flipside, the Bid to Cover rose modestly to 2.443 from 2.364, not only well above the six-auction average of 2.309, but the highest since August 2020.

Finally, the internals were mixed with Indirects awarded 60.9%, the lowest since December, and with Directs surging to 28.55%, up sharply from the recent average of 21.65% and the second highest on record, meant that Dealers tumbled to just 10.52%, far below the recent average of 16.85% and the third lowest in history, with just April 2017 and Sept 2017 lower.

Overall, a subpar auction and one which pushed the 10Y slightly higher for the time being, however expect that the curve flattening will resume momentarily and the 2s10s will invert any second now.

The Financial Times had previewed on Monday that as part of ongoing ceasefire negotiations, Russia was prepared to OK Ukraine’s aspirations to join the European Union, so long as it drops plans to join NATO. 

Further the draft deal, discussed intensely in Tuesday’s Istanbul negotiations between the Ukraine and Russian delegations and leading to a flurry of optimistic-sounding headlines that a ceasefire could be around the corner, included a demand for a formal vows not to join NATO, not to host foreign military bases or troops, and crucially not develop nuclear weapons.

Ukrainian negotiator announced Kyiv’s conditions in the recent negotiations ⬇️ pic.twitter.com/enqvP0Arb4

— Michael A. Horowitz (@michaelh992) March 29, 2022

Notably absent were Russia’s three earlier demands of “denazification” and “demilitarization” – which in recent days the Kremlin has seemed to back off of in official statements. 

The below is a break-down of what the potential deal requires…

The following is from Kiev-based “Ukrainian Independent Information Agency of News” or UNIAN’s transcript of the interview in English…

1. Ukraine needs guarantees that are more solid than NATO’s Article 5
2. Guarantees must be in the form of a treaty signed by all guarantors
3. In the event of an aggression against Ukraine, consultations must be held within 3 days, after which guarantor states provide assistance in the form of armed forces, weapons, airspace closure.
4. Among guarantors Ukraine envisions: Britain, China, Russia, US, France, Turkey, Germany, Canada, Italy, Poland.
5. Temporarily guarantees will not apply to Crimea and occupied Donbass
6. Guarantor will not oppose and will in fact help Ukraine’s accession to the EU

It appears there’s enough momentum for Russia’s top negotiator Vladimir Medinsky to say he will take the proposals for stopping the war directly to Putin. Initially it was reported that talks would continue in Istanbul into tomorrow, but that’s since been denied – which actually could be a hopeful sign given both sides apparently see enough agreeable substance in the draft deal to take them back to their respective capitals. 

Bloomberg has since summarized that the Ukraine side “is seeking guarantees for territory that doesn’t include Russian-controlled areas and that Kyiv is willing to discuss the status of occupied Crimea.”

Russia’s deputy defense minister says Moscow has decided to “fundamentally cut back military activity in the direction of Kyiv and Chernigiv” in order to “increase mutual trust for future negotiations to agree and sign a peace deal with Ukraine.” pic.twitter.com/2qDYOzAzDp

— max seddon (@maxseddon) March 29, 2022

Further, “Russia indicated a meeting was possible between President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelenskiy” – on the basis of the draft deal, despite a formal ceasefire not yet having been reached.

Late in the day Tuesday, Russia’s chief negotiator cautioned reporters that “there is still a long way to go” to reach a mutually acceptable agreement.

Authored by Lance Roberts via RealInvestmentAdvice.com,

“Bear squeeze,” or has the bull market returned? Over the last few weeks, that remains the question as the market rocketed off its lows, eclipsing both the 50- and 200-day moving averages. But is it safe to chase the markets higher?

As we discussed recently, the best 10-days of the market tend to be during the worst periods.

“The firm noted this eye-popping stat while urging investors to ‘avoid panic selling,’ pointing out that the ‘best days generally follow the worst days for stocks.’” – Pippa Stevens via CNBC

Think about that for a moment

“The best days generally follow the worst days.“

The statement is correct, as the S&P 500’s most significant percentage gain days tend to occur in clusters during the worst of times for investors.

The reason that markets tend to surge during market selloffs is due to “bear squeezes.”

“A bear squeeze is a sudden change in market conditions that forces traders, attempting to profit from price declines, to buy back underlying assets at a higher price than they sold for when entering the trade. As the term implies, traders get squeezed out of their positions, usually at a loss.” – Investopedia

A bear squeeze is also known as a “short squeeze.” When prices rise, investors who have shorted either individual equities or entire markets have to close out their short positions. To close out their short position, they have to buy the stock or index and return the shares they borrowed to sell short. That buying increases the price, forcing other short sellers to cover. This cycle continues until the short-sellers are exhausted.

Is The Bull Market Back

Since the lows from a few weeks ago, the market has surged sharply higher. While that surge was impressive, it had “bear squeeze” earmarks, as some of the most shorted names surged higher.

While the rally was significant, with companies like Gamestop up more than 100% in two weeks, the underlying market drivers are reversing.

• Interest rates have moved higher in advance of the Federal Reserve.

• The Federal Reserve is hiking rates and appears committed to continuing in upcoming meetings.

• Liquidity, from checks to households, unemployment, and child tax credits, is ended, and savings are declining.

• The economy is slowing.

• Inflation is remaining stubbornly higher, further tightening monetary policy.

• Earnings expectations for the S&P 500 are declining rapidly, and;

• The Federal Reserve will begin to reverse, or taper, the size of its current balance sheet.

The two most critical points to continuing a bull market are the reversal of liquidity and the Fed’s taper.

We remain concerned about the reversal of liquidity as it was a crucial influence on the outsized market advance in 2020 and 2021. Such was due to the younger investing generation migrating to apps like Robinhood to substitute stock betting for sports.

Secondly, there is a direct correlation between the reversal of the Fed’s balance sheet and market corrections.

Currently, the market dynamics as we advance are less than bullish. We suspect the current rally remains an opportunity to rebalance portfolio risk and manage exposures. Historically, when “bear squeezes” are over, the sellers reemerge and drive prices lower again.

How We Are Trading It

There is no guarantee, of course, that the markets will decline again. Yes, there is a possibility that the bulls could regain control of the market and drive asset prices higher. Such would continue the bull rally that started in 2009. There are also some monetary supports for that thesis:

• Corporate buybacks remain the primary support for asset prices

• Global inflows into U.S. markets remain strong due to a lack of alternatives.

• Corporate profits, while under pressure, remain robust.

• Inflation, while high, will decline later this year, giving a boost to disinflationary trades.

However, we continue to err on the side of caution for now.

With quarter-end rapidly approaching, as noted at SimpleVisor.com, we took advantage of the rally to trim back the equity exposure that we increased a couple of weeks ago. The outsized market gain pushed our short-term indicators into more extreme overbought conditions. As such, we are entering the end of the quarter with a higher-than-normal level of cash which we are using to hedge portfolios against potential risk.

With yield curves inverting rapidly (read this past weekend’s newsletter for details) and inflation running at high levels, the risk of a recession has risen markedly. That recessionary risk is a threat making equities vulnerable to a more significant correction.

For the same reasons we are raising and holding higher levels of cash, we are adding exposure to our longer duration bond holdings. Unlike stocks, bonds are very oversold after a substantial increase in rates. Bonds will also hedge our portfolios against a decline in April should one occur.

What If You’re Wrong?

In virtually every professional field, there is “risk.” 

Those who fail to focus on and recognize the inherent risk, more commonly known as “being reckless,” tend not to be around very long in any given profession. What always separates the “winners” from “losers” are those that can avoid catastrophic damage over time.

The control of “risk: is also the essence of portfolio management.

Understanding risk is essential for investors as it is a function of “loss.” The more risk taken within a portfolio, the greater the destruction of capital will be when reversions occur.

Making absolute predictions, bullish or bearish, is not only useless but inherently dangerous concerning portfolio management. All we can do is make educated “guesses” about potential outcomes based on history, statistics, trends, etc.

So, what if I’m wrong?

What if the market continues to rise and all the above risks fade away?

We invest our stored cash back into the equity markets.

It’s not complicated.

It’s just a process.

As Nobel laureate Dr. Paul Samuelson once quipped:

“Well, when events change, I change my mind. What do you do?”

As a portfolio manager, I am neither bullish nor bearish. I view the world through the lens of statistics and probabilities. My job is to manage the inherent risk to investment capital. If I protect the investment capital in the short term – the long-term capital appreciation will take care of itself.

If this is a “bear squeeze,” we will know soon enough.

The US State Department earlier implied that Biden’s weekend regime change comments saying that “butcher” Vladimir Putin “cannot remain in power” were more based in “emotions” and not on official White House policy.

Russia has subsequently seized upon the perhaps dubious explanation and walk-back, with the foreign ministry expressing it hopes that Biden’s “emotions will not lead to him doing something irreparable and dangerous for the whole world while under their influence.” 

Just prior to the weekend speech from Warsaw, Biden had called Putin a “murderous” and “bloody dictator” and “thug” – this also after last month the US administration imposing personal sanctions on the Russian leader.

Russian presidential spokesman Dmitry Peskov in follow-up said that while security dialogue is needed between Washington and Moscow, this window is rapidly closing due to “personal insults” from the US side, suggesting things could escalate to a more dangerous place.

“We really hear and see statements that are actually already personal insults against President Putin,” Peskov said as reported in RT. Peskov further indicted that despite such “almost daily” insults, Russia would refrain from responding in kind so as to avoid unnecessary escalation of rhetoric, and to leave open the possibility of dialogue.

NEW: The Kremlin says Russia and the U.S. would need to have a dialogue on security sooner or later, but their relations will inevitably be affected by “personal insults” by Pres. Biden directed at Russian Pres. Putin. @Reuters

— Alex Salvi (@alexsalvinews) March 29, 2022

Peskov suggested that Putin would remain “above it” – saying, “Our President is a very wise, far-sighted and cultured international figure and the head of the Russian Federation.”

The spokesman also took the opportunity to remind reporters that the US war machine is responsible for the deaths of hundreds of thousands of people around the world, following decades of unwarranted attacks on other nations, particularly in the Middle East, including Iraq, Afghanistan and Libya.

Only days ago there was this claim from the president…

BIDEN: “I’ve been dealing with foreign policy for longer than anybody that’s involved in this process right now.” pic.twitter.com/BpNuuKN9Bu

— Townhall.com (@townhallcom) March 24, 2022

In recent days Biden has made a series of what the White House tried to portray as mere momentary “gaffes” – including the prior regime change comments targeting Putin. Biden also started off this week by revealing, perhaps inadvertently, that the US is “training Ukrainian troops” inside Poland; however, an administration statement tried to walk it back by merely saying American troops are ‘interacting’ with Ukraine’s military.

Meanwhile…

Doocy: “The big things you say on the world stage keep getting walked back.”

Biden: “What’s getting walked backed?”

Biden: You told troops they are going to Ukraine, the U.S. would use a chemical weapon, and called for regime change in Russia.

Biden: “None of the 3 occurred.” pic.twitter.com/cwZPzANIoC

— Greg Price (@greg_price11) March 28, 2022

Authored by Dave DeCamp via AntiWar.com,

President Biden appeared to reveal on Monday that the US is training Ukrainian troops in Poland. Biden made the comments when trying to explain a recent gaffe. In Poland on Friday, President Biden told members of the 82nd Airborne Division that Ukrainians were “stepping up” against the Russian assault and said, “You’re going to see when you’re there,” suggesting that the US soldiers would be entering the war zone.

Explaining his comments on Monday, Biden said, “We were talking about helping train the troops in — that are — the Ukrainian troops that are in Poland. That’s what the context.”

Today Biden said the U.S. is “helping train the Ukrainian troops that are in Poland.”

Biden’s staff has already walked this back, admitting he was confused. pic.twitter.com/Xj59bsPdMe

— RNC Research (@RNCResearch) March 29, 2022

“I was referring to with — being with and talking with the Ukrainian troops who are in Poland,” he added.

When asked about Biden’s comments, a White House official told Politico that US troops are “interacting” with Ukrainian soldiers in Poland. “There are Ukrainian soldiers in Poland interacting on a regular basis with US troops, and that’s what the President was referring to,” the official said.

Since 2014, the US has trained Ukrainian forces, both openly and covertly. But since Russia invaded Ukraine on February 24, it hasn’t been clear if any training programs were still taking place. If the US is training Ukrainian troops now, it means they are being trained to kill Russian soldiers in the current conflict.

Before Russia’s invasion, the US pulled National Guard troops out of Ukraine and reportedly ordered CIA paramilitaries to leave the country. Secretary of Defense Lloyd Austin reportedly told House lawmakers in February that the Biden administration was considering training Ukrainian forces remotely.

Biden had to explain other recent comments he made, including what appeared to be a call for regime change in Russia. On Saturday, Biden said Russian President Vladimir Putin “cannot remain in power.” The White House appeared to walk back his threat, but Biden doubled down on Monday while claiming the US is not following a policy of regime change in Russia.

Doocy: “The big things you say on the world stage keep getting walked back.”

Biden: “What’s getting walked backed?”

Biden: You told troops they are going to Ukraine, the U.S. would use a chemical weapon, and called for regime change in Russia.

Biden: “None of the 3 occurred.” pic.twitter.com/cwZPzANIoC

— Greg Price (@greg_price11) March 28, 2022

“I’m not walking anything back. The fact of the matter is I was expressing the moral outrage I felt toward the way Putin is dealing, and the actions of this man …  but I want to make it clear: I wasn’t then, nor am I now, articulating a policy change. I was expressing the moral outrage that I feel, and I make no apologies for it,” Biden said.

The Kremlin responded to Biden’s call for Putin to no longer be in power, calling it “alarming.” Kremlin spokesman Dmitry Peskov said Russia will “continue to track” statements from Biden. Russia had recently summoned the US ambassador in Moscow after Biden called Putin a “war criminal.”