FxWirePro: US sanctions to bring in price volatility not only in base metals but also PGMs – Trade ideas for bullion

The price and volatility movements in aluminum once again stole the spotlight in base metals markets, a nearly 7.5% increase in nickel prices in the recent past. Aluminum, nickel, and palladium all remain up by more than 10% since the US placed additional sanctions on Russian individuals and companies two weeks ago.  Understandably, aluminum is the clear outperformer as the supply risks are the most concrete and imminent.

With or without US sanctions, the structure of the commodity metal markets and current fundamentals don't justify prices outside the forecasted range for this year.

Relative to aluminum, the supply chain feeding Russian nickel production is much more direct and streamlined, reducing risk if trade flows were to be disrupted.

In palladium, sanctions would likely have a severe impact on the trade flows from one of the world’s largest suppliers and prices could likely retest YTD highs around $1,130/oz if price gains during the 2014 South African miner's strike are any indication.

Russia produces around 40% of the world’s palladium and its PGM exports are more reliant on countries outside of China like the US (28%), Europe (47%) and Japan (13%).

However, if the risks to supply fully unwind in the near-term, palladium could be vulnerable to revisiting its earlier April lows below $930/oz.  Here we would see value in layering in length based upon our medium-term, fundamentally bullish outlook.

Stay long in CME gold for Dec’18 tenor:

Bond yields have risen to their highest levels in four years, as inflation has added to expectations of continued rate hikes from the Federal Reserve.

As such, we recently boosted our gold price forecasts and recommended length in Dec’18 CME gold.

We saw the early March pullback as an advantageous level to add length and lower our average entry cost.

Added longs in gold at $1,352.80/oz in March for Dec’18 delivery. Maintained again an equivalent unit at $1,327/oz in April for a new entry level of $1,339.90/oz with a trade target is $1,540/oz with a stop at $1,273/oz.

Stay long in CME silver for Dec’18 tenor:

On the back of upward revisions on gold, we have further boosted our silver forecasts and, amidst a broader medium-term precious metals rally, see the potential for silver to outperform gold as the XAU/XAG ratio moves lower towards 70 over the second half of the year.

On the fundamental side, silver’s linkage to industrial demand makes it more exposed to a late-cycle demand thrust, which should also boost its pricing prospects, if anything. As such, we look for silver to break out higher over the medium-term, particularly given its much cleaner investor positioning.

Added longs in CME silver at $17.10/oz for Dec’18 delivery. Maintained an equivalent unit at $16.59/oz for a new entry level of $16.85/oz with a trade target is $19.37/oz with a stop at $16.00/oz. Courtesy: JPM

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