3 Reasons Putin Is Bullish on Gold
NEW YORK ( TheStreet) -- Before a recent pullback, gold was up double digits for 2014. Much of that can be attributed to the turmoil in Crimea and the Ukraine courtesy of Russian President Vladimir Putin. There are three reasons why Putin should be bullish for the price of gold well in the future.
1. Investors traditionally turn to gold when there is a crisis in the world.
SPDR Gold Shares
2. The American response diminished the appeal of U.S. dollar holdings to foreign investors.
Many of the largest owners of Treasury bonds and other greenback assets are potential adversaries. China is the most obvious. So were the Russians. By the White House freezing some assets, foreign investors holding U.S. dollars responded by selling out their positions as a precaution. That could keep others from buying in the future. With fewer buyers, the greenback will decline in value.
3. The U.S. appears weak in international relations.
Legendary investor Jim Rogers once stated that a weak currency is the sign of a weak economy, which is the sign of a weak government. Washington Post columnist Charles Krauthammer, in a recent column entitled "Obama v. Putin: The Mismatch," likened Obama's approach to statesmanship to that of a beauty contestant "...being asked to name her fondest wish."
Secretary of State John Kerry after another failed effort in the Middle East admitted that American foreign policy had received a " reality check ." Those and more do not reassure investors that there is strong U.S. leadership.
Underscoring these factors is still a weak American economy.
The U.S. government budget deficit in fiscal year 2013 was $680 billion. The Federal Reserve , through its quantitative easing program, is buying Treasuries and other securities at a rate of $55 billion monthly. From this, the Fed is basically financing the American budget deficit as no other buyers, foreign or domestic, can be found to buy in at such low interest rates.
Without the Fed buying such massive amounts of Treasuries, U.S. interest rates would be much higher. Investors certainly realize that would further weaken the recovery from The Great Recession. This is demonstrated by their not buying U.S. government debt. It is also seen in in the rising share prices of Barrick Gold, Goldcorp, and SPDR Gold Shares. That, along with the uncertainty of Putin's next step will up the price of gold.