Market Analysis and Commentary on the Latest Russian Sanctions

        To begin with this week, I want to offer an update on last week’s market analysis.

        In last week’s “Portfolio Watch”, I wrote this about stocks and published a chart of the S&P 500 (which I am not reprinting here due to space limitations.  You can visit www.RetirementLifestyleAdvocates.com and download last week’s newsletter to see the chart):

Let’s begin by taking a look at stocks. 

I’ll use the Standard and Poor’s 500 for the analysis.  The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right-hand side of the chart, I have drawn a blue trend line that begins at the end of the calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

Also on the chart, on either side of the green and red price bars (each bar is one week of price activity with the green bars representing the weeks that the ETF price went up and the red bars representing weeks the ETF price went down), you’ll see a blue line (on the top side of the price action) and a red line (on the bottom side of the price action).  Those lines are the Bollinger Band indicator.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

Finally, if you notice on this weekly price chart that last week’s price action ‘gapped down’ leaving a space in the chart between the prior week’s price action and last week’s.  Often, gaps on a chart are closed.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’.  It’s sage advice.

        That rally in stocks did occur; the Dow Jones Industrial Average rallied more than 5% and the Standard and Poor’s 500 Index rallied more than 6%.  Despite the seemingly strong rally, by measure stocks remain in a downtrend.

        The recent rally is counter-trend in my view, with the primary trend remaining down.  To demonstrate how far oversold stocks were going into the beginning of last week, stocks can rally another 10% or so from here to get back to a 20-week moving average of price.

        While stocks don’t have to rally that much, a consolidation period or a continued bear market rally would be more likely than not here in my view unless there is a geopolitical shock to the markets or some other black swan-type event.

        At this point in time, US Treasuries like stocks are oversold just not to the same extent. 

        This chart is a weekly price chart of an exchange-traded fund that tracks the price action of long-term US Treasuries. 

        The faint silver line in the center of the price chart is a 20-week moving average of price.  Notice that since the beginning of the calendar year 2022, US Treasuries have been trading well below their 20-week moving average price.

        Here’s why that may be important.  The 20-week moving average of price is the market’s collective consensus of value over a 20-week time frame.  As one might expect, to calculate a 20-week moving average of price, one takes the closing price of the exchange-traded fund over the past 20 weeks, adds them up, and then divides by 20.

        If the market’s current consensus of value is lower than the market’s consensus of value over the past 20 weeks, that means the market is down trending, at least by this measure.

        The indicators at the bottom of the chart measure overbought and oversold conditions (at least that is part of what they do).  Both indicators are telling us that the US Treasury market may be poised for a rally here although the indicators are not at extreme levels.

        In other news, the G7 announced this past week that Russian gold imports would now be banned.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/markets/biden-g-7-will-ban-russian-gold-imports) (emphasis added):

“The United States has imposed unprecedented costs on Putin to deny him the revenue he needs to fund his war against Ukraine,” Biden tweeted on Sunday, the first day of a G7 meeting in Germany; a formal announcement is expected later on during the summit.

“Together, the G7 will announce that we will ban the import of Russian gold, a major export that rakes in tens of billions of dollars for Russia” he added.

The official talking point here, encapsulated by the pro-Biden outlet, The Hill, is that “while it does not bring in as much money as energy, gold is a major source of revenue for the Russian economy. Restricting exports to G7 economies will cause more financial strain to Russia as it wages the war in.”

That, of course, is incorrect: the biggest buyers of gold in recent years have not been G7 countries (United States, France, Canada, Germany, Japan, the United Kingdom, and Italy), many of whom naively sold much if not all their gold in the recent past and have refused or simply don’t have the funds to restock; instead, purchases have all been by developing-nation central banks (like India and Turkey, and of course China which however has a habit of only revealing its true gold inventory every decade or so) who have been quietly preparing to do what Russia is doing by dedollarizing and instead allocating capital into a counterparty-free asset.

As for Russia, its central bank has been an aggressive buyer of gold, not seller, and if anything Biden’s decision will only make the gold market the latest to follow the example of oil and bifurcate: cheaper for Russian-friends and much more expensive for Russian enemies.

        This decision, like the prior Russian sanctions, will backfire.  Russia and its allies will benefit and the west will suffer.

        Thinking critically about this policy decision, one has to conclude that the US has decided to prohibit the trading of US Dollars, which are rapidly devaluing, for Russian gold an asset that, at worst, has maintained its purchasing power.

        In other words, Russia gets to keep her gold and will not be allowed to exchange her gold for devaluing US Dollars.  That’s punishment?

        The reality is Russia and China, as the chart above shows, have been dumping US Dollars and adding gold as far as their reserve assets are concerned.  The countries have reduced their US Treasury holdings by 25% since mid-2015 and have increased their collective gold holdings by nearly double over the same time frame.

        The data unequivocally suggests that Russia (and China) has already made the decision to slow the exchange of US Dollars for gold.

        Ultimately, I expect this will be bullish for gold and will continue to be bearish for the US Dollar and other western fiat currencies.

        We live in economic times unlike any that anyone alive today has ever seen.  Yet, the ultimate destination is completely predictable. 

        Fiat currencies eventually fail or are redefined.  Unsustainable debt levels eventually cause a deflationary collapse and massive currency creation leads to inflation or hyperinflation before the deflationary crash begins.

        If you are not using Revenue Sourcing™ to plan your retirement income, now is the time to look into it.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Are Currency Changes Imminent? – Part 2

          The big news in financial markets last week was the big decline in US Treasuries.  Not surprising given the news I discussed last week; Russia has now loosely tied its currency, the Ruble, to gold and required any country that Russia deems to be unfriendly to use Rubles or gold when trading with Russia.

          As I noted last week, this move will likely be bullish for gold and negative for the US Dollar.  Many readers could be looking at the performance numbers in the databox above and noting that the US Dollar moved significantly higher last week.  It’s important to understand that the US Dollar Index is a relative measure of the purchasing power of the US Dollar, not an absolute measure.  The US Dollar Index measures the US Dollars purchasing power relative to the purchasing power of the Japanese Yen, the Euro, the Swedish Krona, the British Pound Sterling, the Swiss Franc, and the Canadian Dollar.

          All one needs to do is visit a grocery store or purchase any consumer item to quickly realize that the US Dollar is losing absolute purchasing power.  The other fiat currencies used in the US Dollar Index are simply performing more poorly than the US Dollar on a collective basis.

          This move by Russia, I believe, is the biggest economic news of our time.  As big as when Nixon eliminated the convertibility of the US Dollar for gold.

          Interestingly, at the time Nixon made that move, the ultimate implications of the action were not widely understood by the populace.  I think one could reasonably state that the same could be said about this move by Russia that could be the catalyst for big currency changes globally moving ahead.

          From my perspective, currency changes typically occur slowly.  It’s taken more than 50 years for the US Dollar to lose 98% of its purchasing power.  The US Dollar has been the preferred currency for international trade since the Breton Woods agreement of 1944.  After Nixon eliminated the US Dollar redemptions for gold in 1971, an agreement was struck with Saudi Arabia to sell its oil exports in US Dollars in exchange for military favors.

          Now though, as has happened many times throughout history, currencies are beginning to evolve more rapidly.  Many years from now, looking back, I believe this move by Russia will be viewed as the catalyst for major currency changes that are yet to come.

          Past RLA Radio Guest, Peter Schiff, recently commented (Source:  https://schiffgold.com/key-gold-news/russia-is-quietly-making-the-case-for-owning-gold/):

The head of the Russian Parliament, Pavel Zavalnymade comments recently addressing the subject of economic and financial sanctions. It’s clear that gold is playing a large role in protecting Russian wealth. That role may get bigger and it could create a paradigm shift in how the world does business.

Russia has a lot of natural gas and oil. And it sells a lot of natural gas and oil to the world. Zavalny made it clear that Russia is happy to sell — in hard currency. And what is hard currency? Not dollars.

“If they want to buy, let them pay either in hard currency, and this is gold for us, or pay as it is convenient for us, this is the national currency. As for friendly countries, China or Turkey, which are not involved in the sanctions pressure. We have been proposing to China for a long time to switch to settlements in national currencies for rubles and yuan. With Turkey, it will be lira and rubles. The set of currencies can be different and this is normal practice. You can also trade bitcoins.”

Zavalny said Russia has no interest in dollars, saying “this currency turns into candy wrappers for us.”

In an op-ed published by “MarketWatch”, Brett Arends said this might not mean anything. But it could mean a lot if other countries like China and India follow Russia’s lead. As Arends notes, a lot of countries aren’t thrilled with the United Sates’ ability to control the global financial system with a monopoly on the reserve currency.

Arends also says this adds to the argument for having gold in a long-term investment portfolio.

Not because it is guaranteed to rise, or maybe even likely to. But because it might — and might do so while everything else went nowhere, or went down. Like in a geopolitical or financial crisis where the non-western bloc decides to challenge America’s financial hegemony and ‘king dollar.’”

Arends calls himself “gold agnostic,” but he said there is no question “it has its uses.”

Gold is completely private. It is completely independent of the SWIFT or any other banking system. And despite the rise of cryptocurrencies, it remains the most widespread and viable global currency that is not controlled by any individual country.”

Moves made by Russia in recent weeks could represent a huge paradigm shift in global finance. Many countries have been building toward this for years as the US has weaponized the dollar.

In effect, Russia put the ruble on a gold standard that is now linked to natural gas.

Russia holds the fifth-largest gold reserves in the world. 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 March 28 at a fixed price of 5,000 roubles ($52) per gram. Since Russia is insisting on payment of natural gas in rubles and they’ve linked the ruble to gold, natural gas is now indirectly linked to gold. The Russians can do the same to oil, as ZeroHedge explained.

If Russia begins to demand payment for oil exports with rubles, there will be an immediate indirect peg to gold (via the fixed price ruble – gold connection). Then Russia could begin accepting gold directly in payment for its oil exports. In fact, this can be applied to any commodities, not just oil and natural gas.”

So, what does this mean for the price of gold?

“By playing both sides of the equation, i.e. linking the ruble to gold and then linking energy payments to the ruble, the Bank of Russia and the Kremlin are fundamentally altering the entire working assumptions of the global trade system while accelerating change in the global monetary system. This wall of buyers in search of physical gold to pay for real commodities could certainly torpedo and blow up the paper gold markets of the LBMA and COMEX.”

“The fixed peg between the ruble and gold puts a floor on the RUB/USD rate but also a quasi-floor on the US dollar gold price. But beyond this, the linking of gold to energy payments is the main event. While increased demand for rubles should continue to strengthen the RUB/USD rate and show up as a higher gold price, due to the fixed ruble – gold linkage, if Russia begins to accept gold directly as a payment for oil, then this would be a new paradigm shift for the gold price as it would link the oil price directly to the gold price.”

We could be seeing a slow unwinding of the petrodollar. And the petrodollar is one of the foundations of the dollar’s position as the world currency. We’ve already heard rumblings of Saudi Arabia accepting yuan for oil.

The US and other western powers have tried to lock down Russia’s gold. But as Arends explains, that is virtually impossible in effect.

“Despite some laughable suggestions that the West might somehow sanction ‘Russian gold,’ there is no way of tracing the identity, nationality, or provenance of bullion. American Eagle coins or South African Krugerrands can be melted down into bars. Gold is gold. And someone will always take it. Carry a Krugerrand to any major city anywhere in the world and you will find people willing and eager to take it off your hands in return for any other currency you want.”

            Back in 2011, when I wrote the book “Economic Consequences”, I noted that the Federal Reserve would ultimately determine whether the United States experienced deflation or inflation followed by deflation.  I reasoned that the outcome would depend entirely on monetary policy.

          It now seems that the latter outcome is inevitable and perhaps even imminent.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Will Russian Sanctions Mean Higher Inflation?

Stocks continued their decline last week as metals rallied strongly.  While many analysts blame the rising geopolitical tensions for the decline in stocks and the rise in gold and silver prices, the reality is that stocks went into calendar year 2022 extremely overvalued, and metals were undervalued in light of the massive currency creation that has been taking place over the past couple of years.

          Moving ahead, I expect more upside for metals as central banks around the world continue to create currency despite their talk to the contrary.  Past guest on my radio program, Mr. Alasdair Macleod put it this way in his excellent article this week (Source:  https://www.goldmoney.com/research/goldmoney-insights/when-normality-is-exposed-as-a-ponzi) (emphasis added):

Today, this is the situation with the whole fiat hypothesis. It has been going in its current form since 1971, when President Nixon took the dollar off from the Bretton Woods fig leaf of a gold standard. With a few ups and downs since now we have all bought into the dollar-based fiat Ponzi. Everyone committed to it not only “sincerely wants to be rich” but believes we can be without having to work for it.

Since the 1980s the currency Ponzi was bankrolled by the expansion of bank credit aimed at consumers and their housing until the Lehman crisis. Since then, it has been financed by central bank QE, credit expansion, and the odd helicopter drop. Today, in the wake of covid lockdowns central banks are scrambling to keep the illusion alive by printing currency even more aggressively while screwing down interest rates and bond yields.

Meanwhile, the political class has become complacent. For them, their central banks will continue to fund the state’s excess spending while maintaining monetary and financial stability. And one can easily imagine that in dealing with matters of state, central banks are no longer consulted; their support is simply assumed.

          The Federal Reserve and other world central banks that are now indirectly monetizing deficit spending cannot end loose monetary policies until government spending is reined in; an event that is highly improbable at this time.

          We are living in an interesting time, to say the least.  Stocks and bonds are in a bubble.  Regardless of the reason given for the decline in stocks by the pundits, overvalued assets eventually return to their real value.

          The stock and bond bubbles have been created by the fiat currency bubble.  Or, as Mr. Macleod describes it, the fiat currency Ponzi scheme.  Mr. Macleod also points out that this fiat currency Ponzi scheme may be about to be exposed.  Here is another excerpt from his terrific article (which I would encourage you to read in its entirety by clicking the link to the article above):

Now we face an aggressive Russia. In the West it is unwisely assumed that America, the EU, UK, and their allies can just shut Russia down by isolating it from international financing facilities. By denying access to Western currencies at the central bank level, they believe that the Russian economy will be ruined rapidly. The rouble is rubble and prices are rising. ATMs are empty and bank runs are everywhere. Putin will be forced to give in in a matter of days, or a week or two at the outside.

Putin has responded most alarmingly by announcing the mobilization of his nuclear capability, threatening to liquidate Ukrainians and/or his Western enemies. We can only assume that won’t happen because if it does, including Putin we are all dead anyway. Instead, escalation to world war levels should be more seriously considered as being financial and economic in nature. Last weekend we saw the first financial salvos being fired by the West: sanctions against prominent Russians, withdrawal of SWIFT access for Russian banks, and cutting off Russia’s central bank from access to its currency reserves.

The risk, which is barely understood even by central bankers let alone the politicians, is that Russia has the power to reverse the flows that keep the West’s currency Ponzi alive. In this article, we look at the situation on the ground, estimate how the financial war is likely to evolve, and how the fifty-one-year fiat Ponzi we are complacently accustomed to is likely to finally collapse.

          Mr. Macleod points out that the sanctions being imposed on Russia have not been thoroughly considered and will probably serve to continue the devaluation of the US Dollar.

It appears that SWIFT payments and currency transfers from the Russian Central Bank’s accounts with other central banks will be permitted only for oil and gas payments. The message to Putin is “we are going to do all we can to make your life impossible, but we expect you to continue to supply us with oil and gas”. This only makes sense if the financial sanctions being put in place rapidly bring Russia to its knees, making Putin desperate for the revenue from energy exports.

What is not clear is how Russia can spend the dollars and euros earned from energy exports if payments for imported goods and services are prohibited. If that is really the case, then foreign currency is valueless in Russian hands. The thinking behind these sanctions does not, therefore, make sense. But in practice, SWIFT does not really matter, because there are alternative means of settlement communications between banks. What matters more is guidance for Western banks from their regulators, forcing them not to accept payments from Russian sources. And that is also bound to threaten oil and gas-related transfers. “If in doubt, chuck it out…”

Furthermore, it isn’t clear why Russia needs more dollars and euros anyway. Western leaders and the financial media merely assume that the Russian kleptocracy relies on foreign currencies. This is not true. The Russian economy is reasonably healthy and stable. Income tax is a flat 13%, business regulation is light, public-sector debt is less than 20% of GDP, and the banking system is considerably healthier overall than that of its neighbors. Libertarians in the West can only dream of these conditions. The loss of all oil and gas revenue is about the only thing which would hurt Russia, but that has been exempted in the sanctions. Anyway, depending on the exchange rate, Russia’s break-even oil price is said to be below $45, less than half the current level. Or put another way, Russia can more than halve its total oil exports at current prices and still get by. The margins on natural gas are probably similar.

          SWIFT is an acronym for Society for Worldwide Interbank Financial Telecommunications.  It is a messaging system that banks use to securely send and receive information like money transfer instructions.  Russia has been cut off from the SWIFT system with the exception of payments for gas and oil.  The question that Mr. Macleod raises is an important one – how does it benefit Russia to export oil and gas and take Dollars and Euros as payment if they can’t spend the Dollars and Euros?

          Russia will likely respond to the sanctions in a way that will be unfavorable to consumers in the west.  It will likely accelerate inflation which is already causing pain.  One more excerpt from Mr. Macleod’s piece:

In any event, Russia still has China as a major market for its energy and commodities. By switching extra supplies to China, China would simply cut back on its imports from the rest of the world. Admittedly, the pipeline network to China cannot handle oil and gas volumes on the European scale, but any revenue shortfall can be made up to a degree by additional sales of other commodities.

Therefore, while obviously painful, the sanctions against Russia are unlikely to undermine its entire economy. But Russia’s response might.

Putin will have calculated that with continuing commodity sales to China and other Asian states within the Shanghai Cooperation Organisation (which represents roughly half the world’s population) that they can squeeze Europe on energy supplies for as long as it takes. European nations will have found their economies are in a vice-like grip that threatens to get even tighter. Pepe Escobar’s tweet above refers.

But as Escobar suggests, even if that is not enough, being cut off from spending or selling euros for goods and settling through SWIFT, Russia would be reasonable to request payment in gold because there would be no point in accumulating valueless Western fiat currencies. The Central bank of Russia could then exchange some of the gold for roubles to supply the economy’s need for currency as necessary without undermining its purchasing power, adding the balance to its gold reserves. This would be edging towards a de facto gold standard, which could have the merit of stabilizing the rouble and putting it beyond the reach of foreign attacks. Russia’s gold strategy and its consequences are discussed more fully below.

          Ironically, the Russian sanctions may move the world closer to a gold standard.  China and India, two major trading partners of Russia, have noteworthy gold holdings.

          Looking at the recent performance of precious metals, it seems that much of the world may understand this.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.