The current situation in Ukraine is like a return to the cold war era - a standoff between superpowers fighting for spheres of influence. The gradual takeover of the region of Crimea by Russia is being carried out in slow and deliberate steps as each side gauges the reactions of the other. Despite diplomats scurrying around behind the scenes, the potential for conflict is palpable. Investors have also been active, buying gold as a hedge against any escalation in the confrontation. This trend looks set to continue with hostilities likely to persist.
Referendum Helps Extend Russia’s Influence
The gold price jumped in trading last week to close at $1,382.00 on Friday, which was the highest in over six months. Buying was spurred by concerns ahead of a referendum in Crimea on whether the region should secede from Ukraine and join Russia. The outcome of the vote was hardly ever in doubt considering the large Russian military presence, prompting Western powers to brand the referendum as illegal. The results reflected the contrived nature of the vote, with 95.5% of ballots being cast in support of leaving Ukraine for Russia while many people boycotted the referendum in protest.
Despite the obvious infringements by Russia, the US and its allies are loath to act considering the potentially devastating costs of any armed conflict between nuclear powers. This has given Russia free rein in what it considers to be its own backyard. Russia has thrown its military might around in neighboring countries in the past, such as its brief offensive in Georgia in 2008. As in Crimea, Russia claimed to be defending the interests of its nationals, but this was mostly part of a policy to weaken its neighbors and retain a degree of control over the bordering countries.
Gold As Safe Haven As World Becomes Riskier Place
As Russia makes steady advances in its move to control Crimea, it is clear that the superpower is taking great measures to extend its influence. Russians are still spread throughout the old parts of the Soviet Union in what are now independent countries in Eastern Europe. The US is in a difficult position of wanting to punish Russia to prevent further actions while wishing to avoid outright confrontation. The Obama administration seems to be less willing to use its military capabilities overseas, as evidenced in the case of Syria. Whether this is true or not, the mere perception of US weakness runs the risk of emboldening other countries to act more aggressively.
Furthermore, Russia is not the only hotspot on the radar. Other countries with nuclear technology such as China, Iran, or North Korea may also see an opportunity to act out while the world is distracted by Crimea. In this way, a shift from a unipolar world dominated by the US to a more multipolar world creates a greater potential for confrontation. We may be entering a new state of affairs where geopolitical concerns become a global focal point.
As a result, investors could likely react by holding safer assets such as precious metals. While tensions run high, it would not take much to spark a further surge in gold buying. With no end in sight, this may well be the new reality of the world that we live in.