Moscow Update: Gold During the Crisis

Dear Reader,

Never forgetting that our reason for owning gold is prudence, not speculation (that’s what the stocks are for), we often try to illustrate the point with real-world stories. This week we have a highly instructive update from our friend, a feisty gold dealer in Moscow who’s just lived through a massive economic upheaval.

I encourage you to give it a read, but don’t discount it as a “Russian thing” that could never happen here, wherever “here” may be for you. We’ve seen the same behavior throughout history and across the world. Word to the wise.

First, however, I want to alert you to a terrific new investment opportunity our colleagues at BIG TECH have uncovered in the coming revolution in lighting. Yes, the humble light bulb has been with us for a long time—too long, in fact. It’s time for lighting to enter the 21^st century, and the Casey technology team has zeroed in on the best way to profit.

What I like most about our tech investment publications—aside from the fact that they have delivered excellent returns for us while gold was taking its overlong breather—is that a “better mousetrap” can make investors money even in economic hard times. Perhaps especially in economic hard times. And I’m sorry to say, I do expect global economic conditions to continue deteriorating.

Even if I’m wrong, however, a better mousetrap should still make tons of money for investors. That makes solid tech speculations great pair trades for our gold stock speculations—it’s even possible we could win on both.

Give it some thought, and see if the opportunity our tech team has uncovered looks right for you.

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research

Moscow Update: Gold During the Crisis

Editor's Note: Dmitriy Balkovskiy is a Russian coin dealer in Moscow we’ve interviewed before. Since the ruble’s crash, he’s witnessed some interesting developments in his country, so we asked him for an update.

By Dmitriy Balkovskiy

I would like to expand on Jeff Clark’s piece ““Gold Was Up 73% Last Year” with some real-life stories from inside Russia.

First, a small correction… Jeff describes an investor sitting in a Moscow café and reading about gold’s phenomenal rise in rubles in a Russian newspaper. In reality, gold-related info in a Russian newspaper would be buried on page 17 and very difficult to locate. “Serious” gentlemen deal in stocks or real estate; gold coins and bars are for the naïve. In this respect, Russia is no different from the USA, and even worse.

Now to my episodes…

• Our small office is located about 200 meters from the Kremlin’s entrance, right across the street from it. So sometimes we get visitors from within those walls. In the early afternoon of December 16, a Ukrainian construction worker came in wishing to buy a one-ounce Austrian Philharmonic. He had just finished several months of work at the Kremlin reconstruction site and wanted to get rid of his rubles and take home a hard asset. (Note: December 16, 2014 has already been named the Russian Black Tuesday. On that day, the ruble fell from 58 to 72 per USD in several hours.)
  
  Now this guy must have been burnt a few times in his life, because he wanted to check the coin for authenticity in every possible way. When he first entered the door, the coin sold for about 86,000 rubles. It took us about 30 minutes to complete the checking procedure to his satisfaction—but when we looked at the price again it had soared above 100,000 rubles. Unfortunately all he had in his pocket was 90,000 rubles. The coin had literally slipped from his grasp.
  
  He told me he had long wanted to buy a thick gold chain, and so we suggested a jewelry store nearby. “Prices do not change there as often,” we told him. Off he went with a sigh.

• That same day I went to a nearby branch of Sberbank (the biggest banking chain in Russia), which was full of people, probably 100 customers. They looked grim and determined to withdraw rubles and buy dollars and euros ASAP. I addressed bank tellers I know there: “So our dear countrymen are vacuuming hard currency at historical highs again?!?” Girls giggled in response. It is both painful and funny to see Russians repeating the same mistake again and again.

• An elderly woman at the supermarket cashier, in response to the rumors about a possible freeze of bank accounts, said, “They will take away our money like they did in the early ‘90s?” I replied, “Why not try gold and silver for the long term?” She testily snapped, “What are we gonna do with them—eat ‘em for dinner?”

• A discouraged friend told me, “I’ve got to buy euros to pay my rent (rents are often fixed in euros in Moscow), but any exchange office I go, they have run out of euro cash.”

• A couple days later I overhead this conversation at an electronics retailer: “Honey, I still have some rubles left on me—let’s get a third flatscreen TV.”

Now here we are in the middle of January, and 1 USD goes for 65 rubles. Have any lessons been learned? Have Russians turned into hard money enthusiasts? Unfortunately, US dollars and euros (and even flatscreen TVs) are still seen as better hedges against chaos than gold.

What about all those articles about the Russian central bank buying gold? Actually, very few Russians are meaningfully aware of these purchases. It hasn’t influenced people’s financial decisions yet… although it should—the Bank of Russia bought 171 tonnes of gold last year, more than any other central bank in the world.

Meanwhile, as I write, a Russian language website is teeming with ads offering to sell those appliances bought for 40,000 rubles in December just for 32,000 rubles!

Does this mean there won’t be a gold bull market in Russia? I think it would be a mistake to draw that conclusion, and here’s why…

First, there was an upsurge in gold and silver sales at the end of 2014. Some local sources said coin sales grew by 50%, some by 100%. Our sales volume also definitely picked up in December compared to last fall, but April 2013 was much more active in terms of volume and interest. Keep in mind that all of this is from a very low base.

The most promising sign is that regional bulk buyers reappeared after a long absence—these guys come in with cash and buy 50, 100, or 150 ounces of gold at a time. They are mostly provincial businessmen looking to “deep freeze” their savings for the long term, always taking the newest and cheapest one-ounce gold coins. The concept of precious metals ownership is slowly seeping into psychological makeup of Russian businesspeople.

A major financial event or a sudden spike in the USD gold price will serve as the real catalyst for a gold stampede. The loss of trust in Western currencies for economic or political reasons may stir Russians to action, too.

Second, gold ownership is just one wholesome habit in what I call “personal fiscal hygiene.” Russia in many ways runs far ahead of the developed world in terms of debt prudence and anti-welfare mentality. Here are just two examples in support of this:

• Mortgage debt. Russians also buy real estate on credit, but the size of the market is miniscule. There is about $51 billion in residential mortgage debt outstanding in a country of 144 million people, of which only 3.5% is in currencies other than the ruble. This is pocket change compared to the US—yet you should hear all the anti-debt rhetoric in the local media.

• Unemployment benefits. Here’s a headline for you: “Level of Unemployment in Moscow Will Rise to 0.5% by 2017.” And this is from 0.35% (25,100 people) who are officially unemployed here today. There are about 13 million residents in Moscow, and the real rate of unemployment or underemployment is way higher than that.
  
  The highest level of benefits here is about $78 per month, and that’s really for former top managers. You can count on benefits for about three months, and they will literally hound you with seminars, job fairs, and check-ins. Just to put this number in perspective… the cheapest apartment here costs $50,000 to $60,000, and it would be just a hole in the wall. As a result, Russians simply don’t register with the unemployment office; they try get along on their own.

The majority of Russians have a savings-oriented mentality, so gold would fit rather snugly into their financial frame of reference.

It’s time for Russians, Americans, and everyone else to wake up, face up to the dangers of statist debauchery, and prepare ourselves for the hard times to come!

Gold and Silver HEADLINES

Russia Adds to World’s Fifth-Biggest Gold Reserves for Ninth Month (Bloomberg)

Russia shows no signs of slowing its gold purchases, as the fifth-biggest holder boosted reserves for a ninth consecutive month.

The country’s gold reserves rose to about 38.8 million ounces as of January 1, from 38.2 million ounces a month earlier, according to the central bank’s website. It’s the longest stretch of monthly increases since August 2013.

Russia has more than tripled its gold hoard since 2005 and holds the most since at least 1993, even as it recently used its international reserves to defend the ruble.

We don’t see Russia selling its gold anytime soon. If anything, given its track record as a (very) consistent buyer, it is probably out shopping for more.

World Bank: Commodities Falling Like It's 1985 (Mining.com)

This year may well see a rare occurrence for world commodity markets—a decline in all nine key commodity price indices, says the World Bank’s latest Commodity Markets Outlook.

Oil is still down 56% from the most recent high of $108 per barrel in mid-June 2014, representing the third-largest decline since World War II—previous records of a seven-month decline of 67% occurred in 1985-‘86, and during the global financial crisis in 2008 that saw a 75% drop.

Most commodity categories were soft last year, and the bank believes this broad-based weakness will continue throughout 2015.

Recent News in International Speculator and BIG GOLD—Key Updates for Subscribers

  International Speculator

• 2014 proved to be an excellent year for our newest recommendation, which beat its initial production projections for the year by 25%—truly an astounding achievement for a new miner still ramping up. Better yet, the company is already making money—along with higher gold prices, the bottom line in 2015 should be very good.

• One of our favorite explorers reported more high-grade drill results from its flagship gold project in Canada. We expect more excellent drill results, expanded and upgraded resources, and likely even better project economics over the course of this year. The company is cashed up and undervalued, making it a Top Pick.

 BIG GOLD

• This gold producer reported record production for 2014, and also expects significantly higher output in 2015—here’s our analysis.

• One of our Buys just delivered intriguing drill results, including some high-grade hits that contain visible silver. More important, the drilling was done beyond where the current resource is located, which indicates the project is likely to get bigger.