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Aggressive sanctions against Russia would spell bad news for gold - TD Securities

FXStreet (Łódź) - Bart Melek, Toronto, Head of Commodity Strategy at TD Securities suggests that the broadening of West's sanctions against Russia could push the country to sell gold to secure FX liquidity, which would put pressure on the yellow metal.

Key quotes

"In addition to the growing likelihood that the US Federal Reserve will start seriously thinking about lifting the Fed Funds rate sooner rather than later, this situation represents an additional unpleasant reality for gold in the months to come."

"We will know as early as Friday if the European Union will prohibit investors from buying new Russian sovereign paper. If the EU does this, the US is very likely to follow the same policy, in retaliation for Moscow's role in the Ukraine conflict."

"As proposed by the UK, we could also see Russia being barred from using the SWIFT banking network, which is the method that has been effectively used against Iran."

"Under the assumption that Russia has an USD80 billion worth of external debt maturing this year with the central bank funding the debt, along with the current FX reserve burn rate, the Russian FX reserves would be exhausted in the first half of 2016."

"If Russia's access to the SWIFT system is inhibited, these reserves would hit critically low levels much before that. Either way, the Russian central bank would be forced to liquidate gold to get liquidity."

"The ruble would get hit too, as there would be little ability to defend."

"Russia currently holds some USD466bn worth of foreign exchange and gold reserves, with the yellow metal representing some 9.7% of the total. If the FX component slides as we project, Russia would be overweight gold fast."

"Sales would no doubt be negative for prices."

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