Capital Trust Markets – For twelve hours on Sunday, March 17, the Crimean parliament asked its residents to vote on the future of the region. Voters had two options. The first, to join Russia, the second, to remain a part of Ukraine but with increased autonomy. The former proved to attract the overwhelming majority, and on Monday morning, Russia named the Crimean peninsula as annexed to its Federation.
As the markets open on Monday, what impact might this decision have? The answer lies in sentiment. Europe, the U.S. and Asia have declared the referendum illegal, and in turn, vowed to impose economic sanctions on Russia. The geopolitical, and potentially military, tension such sanctions could create will likely turn traders and investors towards a risk-off sentiment, as they reduce their exposure to any assets that are vulnerable to devaluation.
Traditionally, the benefactor assets in such situations are the precious metals, gold and silver. Heading into the Monday morning session however, the markets seem to be overlooking the unrest; at least for now.
The Asian session saw gold and silver gain strength, as expected, but at Monday U.S. open, the precious metals start the day on a somewhat weaker footing. Gold futures (April 14 delivery) are down 0.04%, currently trading at 1,378.50. Silver futures (May 14 delivery) are down 0.58%, with the contracts currently trading at 21.28, just shy of key February resistance.
These small declines may simply be a correction of the action seen in the gold and silver markets towards the end of last week, as both assets gained strength heading into the weekend. Whatever the reason, expect a resurgence in the precious metals as the week plays out. The stock and currency markets look resilient at present, but any hint at escalation will likely have a domino effect on sentiment. The more risk averse operators are likely already reallocating capital, but there is undoubtedly a fringe group that are holding their exposure with one eye on the events as they unfold. Any suggestion of military mobilization will spur this fringe into action, which will likely drive a sell-off in the stock markets and a shift toward gold and silver. The more risk-prone investors will not react to events in Ukraine, but purely to market action as stocks decline and the precious metals appreciate.
Look for gold to test 1,420.00 resistance before the middle of the week, and silver to hit 22.00 within the same timeframe.
About the author
Written by Samuel Rae – Currency Strategist at Capital Trust Markets