Just a quick update as things are moving quite fast in the PMs.

Gold, and the rest of the PM sector soared, so you might be wondering why this is happening, how much it changes, and what should one do about it.

WHY

The first pages of Bloomberg.com and Reuters.com both feature (in their most prominent places) stories by the following titles: “Russia has enough troops massed to invade Ukraine, U.S. says” and “U.S. Says Putin May Not Wait for Olympics to End: Ukraine Update”. The topics on those pages (at least on Bloomberg.com) change, just several minutes ago, I read topic that said something like “U.S. says that Russia might invade Ukraine next week”. This looks like “peak concern” as far as the Ukraine-related tensions are concerned. And, since the markets move on rumors, this triggers safe-haven buying and gold rises.

And when the market realizes that there will actually be no invasion, all those gains will be erased – everyone who bought on this piece of news (rumor, to be precise), will have no reason to hold gold once the tensions subside.

Please consider the titles themselves. They trigger anxiety, but they have not informational value with regard to what’s likely to happen.

“Russia has enough troops massed to invade Ukraine, U.S. says” – well, it doesn’t even say “successfully invade”. Would two soldiers be enough to “invade” a country? Yes! Would it make the invasion successful? No. Does it – in any way whatsoever – make the invasion likely? No. Is this really news? Absolutely not – Russia had enough troops to invade Ukraine for many years now. This doesn’t mean that the invasion is likely, and in particular, it doesn’t mean that it’s likely to happen next week.

“U.S. Says Putin May Not Wait for Olympics to End: Ukraine Update” – the key word is “MAY”. Just because something MAY happen, doesn’t make it likely. You MAY encounter a big meteorite made entirely out of gold tomorrow. You MAY hear the best joke you’ve ever heard in about 5 minutes from now. You may come up with a world-changing business idea next week that would put Twitter out of business. All of this, and millions of other things MAY happen, and stating that doesn’t make it likely. Just saying that something may happen is completely useless. If one wanted to really say something meaningful, they would need to say that something is likely. The “problem” here is that then this person should provide this with a proof or indication – some sort of argument. Purely saying that something “may” happen has no informational value, and thus doesn’t require any proof. But it gets the job done as far as inducing anxiety is concerned. And the markets have reacted.

The invasion on Ukraine is unlikely, and I already wrote about that several days ago. Here’s the quote:

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Tensions around Ukraine have just supposedly escalated, which likely made people buy the precious metals (and mining stocks) as safe havens against possible geopolitical turmoil – against any possible annexations, war, and similar.

I put “supposedly” in bold because, in my opinion, that’s simply not true. It’s possible (everything is, right?), but just because something is possible, doesn’t make it likely.

In particular, in the case of the above-mentioned supposed “news” about greatly increased tensions, I don’t think that the safe-haven buying frenzy is justified. It’s not, and there are several good reasons for it.

First of all, let’s consider the source of the information. The source was the White House, which is on the other side of the planet. It’s the very opposite of the “local source”, or a source that would not be biased by any agenda (here: political). It’s also the same source that provided misleading and/or unverified information many times in the past. 

Remember when gold soared on the U.S.-based news that an Iranian ship attacked some other ship, “likely” leading to conflict? Nothing like that was confirmed by any other source. Remember Iraq’s weapons of mass destruction (before the U.S. invasion of that country) that were never found? I don’t mean to say that everything coming from the U.S. government and White House is “bad”. I’m saying that the information on which the market rallied is of relatively low quality when it comes to objectivity, and thus that market’s reaction was way too big, compared to what makes sense. 

(…)

One of our Team Members is located in Ukraine (the source doesn’t get any more “local” and objective than this), and he had this to say about the current situation:

“I’m sure that Russia, with its current president Putin, will never take massive military action against Ukraine. If they wanted to do it, they could probably “capture” all of Ukraine in a matter of weeks, if not days. It would be a quick fix for the problem of uniting what has always been one country (Kiev, the ancient capital of Russia, and Kharkov, where I was born, had always been in one state with Moscow until thirty years ago).

However, such military action would create the ideologema of a “captured” Ukraine for future generations of Ukrainian nationalists, resulting in the obvious intent to liberate the “captured” state. It might also make countries that are currently friendly to Russia perceive it as an aggressor. Those are just a couple of the many reasons why it’s obvious to me that such military action is not going to happen any time soon.

The news/propaganda might be targeted toward forming the public opinion on joining Ukraine to NATO, painting the picture of “Russian aggression” or other social engineering purposes”.

Moreover, please note that what we’re discussing here is a geopolitical event, and such events are likely to have only a temporary impact on the precious metals’ prices. We wrote about that in our Dictionary section, and you’ll find more details there.

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HOW MUCH IT CHANGES

How much does it all – and today’s rally change? Nothing, really. If that’s “peak concern”, it’s also likely “peak price” or close to it. In fact, it’s in perfect tune with the triangle-vertex-based reversals that are due next week. It's also in perfect tune with the previous local breakouts above the declining red resistance line that I described in today's regular analysis (gold's medium-term chart) - when gold moved above it previously, these breakouts were then invalidated and much lower prices followed. The same is likely to take place also next week.

WHAT TO DO ABOUT IT

As always, the decision is up to you – it’s your money. I’m not doing anything with my short position in junior mining stocks. If I didn’t have it in place already (at my desired – significant – size), I would have either entered this short position or I would have added to it.

All in all, we saw a rally, but it’s unlikely to be the start of a bigger rally. Instead, it’s likely that what we saw was either the final part of the corrective upswing that started in mid-December, 2021, or it’s close to the final part of the corrective upswing. Either way, I think that the short position in the junior mining stocks remains justified from the risk-to-reward point of view.

As always, we’ll keep you - our subscribers - informed.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief