Gold and commodities soar as Russia-Ukraine conflict drives markets 

Shae Russell:

Welcome to the Pot of Gold, where we talk all things precious metals and their markets. Today, we discuss the different factors influencing gold and silver. We look at soaring commodity prices and the risk these bring to the market. And finally, we discuss how the changing of seasons may slow Russia's invasion in the Ukraine. I'm your host Shae Russell of ABC Bullion and joining me today is precious metals expert, Nick Frappell from ABC Refinery. Nick, how are you mate?

Nick Frappell:

Very well, thanks, Shae, and good to start another podcast with you.

Shae Russell:

Certainly is, now this one's coming a little quicker than our last podcast. Normally we have 14 days between podcasts, but we've brought forward our recording date to seven days. Because, let's be honest, the markets are changing quite quickly and there's an awful lot to digest and analyze happening right now, don't you think?

Nick Frappell:

Yeah, absolutely. The news cycle is much faster at the moment than it was perhaps even a month ago.

Shae Russell:

Yes, certainly. Now, before we get to some of the events that we want to talk about today, I do want to talk about gold. Now look, gold, overnight, so what's the date of recording? Today is the 8th of March.

Nick Frappell:

8th of March.

Shae Russell:

I probably should have checked that first. Today's the 8th of March. I believe gold got near $2,000 per ounce, overnight. Tell me, what's happened to gold in the last seven days? And how has this changed any of your technical price targets?

Nick Frappell:

Yeah, gold's had about two cracks at $2,000 in the last 24 or 36 hours or thereabouts. And, obviously, it's a big round number. Round numbers like that shouldn't matter technically, but of course in people's minds they do. And when we've got close to that level, the markets sort of had a if you like, a mild rejection, well, fairly mild, dropped about 62 overnight. So, couple of percent move in compared to nickel that's a fairly mild move. But what that might suggest is as we get to those levels, people who got long at really, really good levels are quite happy to let gold go in the absence of any really changing news or any fresh news. The other thing of course is these high prices they are naturally encouraging secondary metal to appear in Southeast Asia. For example, probably everywhere, but certainly we can say the high prices that tend to attract gold out of say Thailand and so on.

Nick Frappell:

And with strongest dollar and relatively weak currencies elsewhere, that's probably raising the domestic price and making it more attractive. So, there could be a little bit, as we get to 2000 people are thinking, "Well, gold has come a reasonably long way reasonably quickly and happy to sort of let go." Target wise it's not really changed things because we still have targets up to certainly beyond 2000 nothing necessarily. It depends what kind of timeframe you look at. If you look at the short to medium term timeframe 20, 35, it's one of the targets we have on a medium-term point and figure. Daily point and figure, which is actually ultra-long term has targets well, up into the I think 2200s and 2300s, and we don't expect those targets to be achieved. They're not guarantees, but they would be longer term outcomes. But at the moment the price is every time it comes up to 2000, we've seen a little bit of a form.

Shae Russell:

All right, moving on. Let's talk about what managed money and open interest are telling us about interest in gold right now.

Nick Frappell:

Yeah, absolutely. So, the last date we had for the managed money was Tuesday, the 1st of March, coincidentally my birthday and that delivered some interesting news because actually the longs rose to 18.72 million troy ounces fairly long. It's an increase of 360,000 ounces not particularly dramatic. The shorts actually added more buying by reducing 13%. The longs added 2%, not a big difference. Shorts bought back so they reduced their position by 13%. So, actually, the shorts, the buying from the shorts little bit outweighed the buying from the longs, which is interesting when we look at silver.

Nick Frappell:

But so basically the net positioning is almost shy of 15 million answers, 14.86 managed money, long as 18.72. Moving on to gold ETFs as of Friday, actually we've been a bit hectic. So, this is perhaps one day out we're clear of a 100 million, got a 101.6 million gross length in the ETF space. As I said, last week, the historic high commitment is 111 million answers. It's about one and a quarter million answers or added to ETFs over the course of the week. So, no surprises people adding, but more so in the ETF space.

Shae Russell:

So just to use an analogy that you mentioned a few podcasts ago, this is basically fast money and slow money. I think that was how you referred to the managed money side of things and the ETF side of things. So what we're seeing in managed money is its very much short buying back drive that momentum over there, the fast money, but over in slow money, we are seeing a solid one and a quarter million ounces being added into ETF. So they're telling the same story, but they're coming at it from different angles. Would you agree?

Nick Frappell:

Yeah, that's right.

Shae Russell:

Now, speaking of exciting stories, silver has gone on a ride in the past seven days. Now, I believe just before we jumped on the silver price, was trading at $25.49 cents per ounce. I think it's taken a run at $26 per ounce in the past couple of days. Tell me, what is the story? What is the technical picture in silver? And is it different to gold?

Nick Frappell:

Yeah, it is actually different. Well, let's look at the technical picture first. We've talked for a long, long time about silver being below the weekly Ichimoku cloud. In that sense, from that quite intermediate to long term view, it's that is a technically bearish outcome that might surprise people who are quite reasonably bullish about silver, including myself. But the fact is that silver was below the cloud. And the interpretation of that is bearish. When we looked at the price just recently, it was straddling the top of the cloud. That's the highest it's been the best it's looked technically for a long time. So, it's a really interesting and a really important sort of transition point. The other thing that I think really, really interested both of us was looking at the difference with gold in the managed money aspect, the positioning.

Nick Frappell:

So again, going back to the reporting as of 1st of March last week, last Tuesday, that showed a really, really, really solid increase in managed money longs who are voting to buy silver. 27 and a half, almost 28% increase in managed money length that's 64.28 million answers of fresh buying from the managed money longs. Managed money shorts they bought too, of course they were reducing their positions as prices rose. They reduced by 18% as good it as, and that took their position down to 86 and a half million ounce short. That was an increase of buying decrease in shorts, just to sort of mess with your mind of 19 million answers. So that was roughly 83, 84 million answers of net buying in the week ending the first. That's pretty chunky. The main thing is the difference with silver is it's really about the longs adding over four times as much four and a quarter ounce of length for every one ounce of short covering. Whereas with gold, as we just said, some buying from the managed money sector, actually more short covering from the managed money shorts.

Shae Russell:

It's interesting that there's two different technical pictures playing out between the two metals. Now, just to elaborate a little bit more on what we're seeing, technically the technical price action in silver, do you think the shorts coming out of the market and the longs coming in are because the fundamentals of change or is it opportunistic because the price is risen?

Nick Frappell:

I think it's a vote of confidence in the technical picture. I think that it's one of those paradoxical situations where the outlook for a great many things does not look positive. The commodity price inflation is great if you're a producer of commodities, but it's not a great thing for sort of net for consumers. So, copper has risen sharply, oil has risen sharply. I think silver is following or taking note of those price rises again across if you like the commodity complex. So, it's... And we sometimes talk about silver being a copper driven metal sometimes, and a gold driven metal at other times. It's part of the whole complex gold and copper are rising, and copper is rising largely. I'm not really going to comment it to an extent because is not trading it, but it is notable that copper stocks are much, much lower than they have been for they're well below the 200-day moving average for copper stocks.

Nick Frappell:

And I think they're about 70,000 tons from the last bit of debt data I've got from the LME. So, stocks are falling sharply and with Russia effectively being increasingly isolated via sanctions. Russia isn't a huge producer of copper, but I think when you looked at it, it's ranked about the seventh in the world. It's not an insignificant producer of copper either. So, on the margin, if you were to subtract them from total supply, that's significant.

Shae Russell:

We're going to get a little bit more in the wades of how the rising commodity prices in the second half of today's conversation. However, as host, I have one job and that's to keep today on track and I failed miserably because Nick, we didn't talk about the cloud for silver or copper, sorry for silver or gold again. So, before we get onto the macro part, let's quickly summarize what's happening with the Ichimoku cloud of which I am an absolute convert. Tell me, start with silver.

Nick Frappell:

So, the silver weekly, we're breaking up through, I confess because I was kind of... We're sort of dashing around a lot before the podcast. So, I didn't look at the last picture, but I know that it was breaking up through at least straddling that level. So, it's right at the point of resistance, but the fact that it's risen all the way through this, the cloud, and it's now the weekly cloud and it's now sort of poised hopefully to break higher. That is a switch to bullish, but we have to watch it quite closely at these levels because it's right on the cloud.

Nick Frappell:

And I do recommend people look at it that way and just to sort of follow it through that lens if you like. Gold has gone so far above the... When it broke out of the weekly cloud top, it broke out around about 1834 at 1837 in US dollar terms. Now it's 1990 odd at the last glance before I sort of went into this tiny little cell. So it's well clear of the cloud it's completely buoyant and broken free of the constraints of the weekly cloud. The weekly cloud will gradually catch up with it.

Shae Russell:

All right, I'm glad we managed to cover that in two days chat because I wouldn't be able to sleep at night if we didn't. Now, I want to move on to the media part of today's conversation. Now, obviously the Ukrainian Russian conflict is showing no signs of easing. There's been failed peace talks, there's been humanitarian corridors that have been ignored. So what was, I guess, a curiosity in headlines four weeks ago is the situation's rapidly disintegrating and it's starting to impact markets quite severely. And we're seeing that in commodity prices. Tell me with, especially from a metals market point of view, drawing on your experience, how do you see this conflict playing out and impacting the market's perception of it over the next few weeks?

Nick Frappell:

It's quite hard to say because it'll be so largely news driven and things can turn on a dime. Interestingly, if you look at say nickel yesterday, nickel had an incredible rally where it touched $55,000 a ton. That seems to have been driven by some major nickel shorts that couldn't pay margin, couldn't meet their margin calls. And therefore got stopped out in probably relatively thin market that given Russia's importance to the nickel production chain. People didn't want to be short of nickel, but so any buying there just lifted the price incredibly. I think... From memory, the nickel closed out last Friday was about $29,000, roughly. I haven't got this in front of me. So it's absolutely roofed. It touched $55,000. Obviously fallen back somewhat since that high. The thing to bear in mind is that now that those stops have been taken out of their, as another shorts have been taken out of their positions, that's a major round of buying that has disappeared. Looking at the wider commodity space crude.

Nick Frappell:

We had a target for point and figure to 150 bucks on one of the per barrel on one of the major long term charts log, 1% close only chart. And on that via Brent, which of course is at the moment is moving pretty much in tandem with WTO the March 2020 days along behind us. But that target, I'm not sure exactly where Brent made its high, but the interesting there is that the markets is extremely tight and the sort of prompt to prompt nearby futures is as tight as it's been for several years. That tells you that it's not just... There's absolute concerns about supply and the fact that America is rumored to be talking or perhaps talking to Venezuela about getting some of the Venezuelan heavy sour crude sort of disembargoed, if that's the right word and tells you that the market people are concerned about tightness and that recent releases from strategic reserves haven't really mattered to the total demand and supply situation.

Nick Frappell:

So incidentally, that sharp equitation means that it really, really costs you to be short and it pays you to be long. So that, will obviously angle people's sort of approach to crude. But look, I think if you look at the whole complex, whether it's ags or most certainly the grain sector, energy and so on, this is a market that's going to remain tight for some time. And given that president Putin has said, I think in the last 48 hours that he fully intends to carry on and commit to this conflict. And then the Ukrainian invasion, as far as that attitude and reality is that's the reality on the ground then prices should reign higher and supported by...

Shae Russell:

So what you're saying is we've moved beyond the reflation trade of 2021 and that we're seeing definite inflation in commodities for 2022.

Nick Frappell:

Oh yeah, absolutely. A 100%. And no doubt about that since the war which is kind of... What's interesting is how some markets palladium is bringing to mind in the week prior. I think we mentioned this in one of our podcasts last month that if you looked at palladium, it's expensive, but the Ford market in palladium didn't seem to be casting a negative verdict about the likelihood of war, because I think it was in a very gentle backwardation, but nothing unusual in palladium world. Prices have rocketed since then and so I guess that tells you, in retrospect how unexpected some of these outcomes were. Certainly some markets made very little forward looking indication that the market anticipated this kind of conflict and, or a conflict that would last for long enough and be met with such strong resistance, that it would generate a really, really powerful disruption throughout commodity markets in general.

Shae Russell:

Speaking of a powerful disruption, just before we jumped on air, you mentioned there was a particular type of season coming up in the Ukraine that may actually impact how Russia's invasion progresses.

Nick Frappell:

Yeah. And I probably will get this pronunciation wrong, but not least because I've written it down rather roughly. But I think it's a [Rasputitsa], which is the four. And I'm not sure exactly. I was trying to search furiously to find out when the expected start date is. It might be sort of happening around us, given that it is March, maybe not. But the point is that should be... That seems likely to impose a change or a disadvantage to Russian mobility, because I gather that it tends to confine people to the roads and confine the movement of tractor vehicles and certainly wheel vehicles to metaled roads.

Nick Frappell:

And that would imply without sort of trying to speculate on something that I'm not fully across, but it would imply that the Ukrainians would find it easier to bottleneck Russian movements as they try and sort of move around the country to sort of gain control and to attack sort of major population centers which of course is seeming to happen. And again just my opinion here, but the fact that it's ramping up would suggest a loss of control of the plot or the narrative, the strategy, because I don't think that was part of the initial aim, but it's a consequence of not being able to move and do things quickly and successfully.

Shae Russell:

Now, before we draw to a close today, I do want to touch on the Aussie dollar. Now, obviously we've seen an incredible rallying commodity prices for the start of the... In fact, I've got a note here that Bank of America says it's a strongest start to commodity prices since 1915. That's a memorable year for all the wrong reasons, obviously, but of course, Australia being, having a... One day, I'll learn to get my words out the first time. Australia having a commodity based currency makes us obviously highly susceptible to price rises in commodity prices. Now in the past week alone, the Aussie dollar would be up say about 2%, but I believed it reached a high of 74 something cents in the past 24 hours. Now, with your managed money positioning, you did point out yesterday that while it's rising, I don't think you are... You mentioned you don't, there's not a lot of longs coming into the market. So is there not a lot of conviction in strength in this Aussie dollar rally?

Nick Frappell:

Doesn't look that way. And I must admit the sort of... I think I've been mentioned as being bearish in the last couple of weeks of podcasts and with more of an emphasis on the downside targets that we discussed back then. So, of course, and I know a lot of that was predicated on China property issues, weaker demand in China relating to Australia and relating to the Aussie dollar. But of course, as you say, rising property prices, sorry, excuse me, rising property prices nobody can stop thinking about that. Rising commodity prices that obviously is really positive for Australia's terms of trade. But when I look at the changes in managed money, or actually, I shouldn't say managed money, I should say non-commercial because it's actually in different category in sort of the ADA, the Australian dollar futures market, just a legacy thing.

Nick Frappell:

The non-commercial link, which was absolutely kind of got down to negligible proportions. It increased by 10% in the week ending the 1st of March, but 10% of not very much is not a huge drama. And in fact the middle of February positioning had dropped by a third. So, it's recovering from a very low base. Shorts have been buying back for, I mean, in early Feb shorts were 10.3 billion in size. Since then, there's been a steady sort of rollback buying back of shorts and about roughly 11% reduction, I guess, in the size of shorts, nothing huge. It doesn't look at the moment as though people have yet bought in, but of course, we're looking at positioning numbers from the previous Tuesday. Tuesday, the first, not today, we'll know more about what's happening in the Aussie at the beginning of next week, because that's just the way the numbers are updated next weekend.

Nick Frappell:

That's going to be more useful perhaps because we'll have seen some of those bigger moves in commodity prices coming through. But at the moment look, there were targets up to 74 and 75, the Aussies achieved that. I don't think it's done anything yet to change the long term kind of macro view where I'm still... I think bearish is the kind of word I'm looking for here. But I don't think it's done enough to disrupt that view, but we'll see. Certainly, as you say, high commodity prices, good for the Aussie.

Shae Russell:

I like your take there, Nick, because one thing I'm a fan of is your long term point in figure charts. And I know that every now and then you can be quite the outlier with your analysis and it has panned out to be quite accurate in the past. Now we are...

Nick Frappell:

If you hold on for grim death.

Shae Russell:

All right, so we are going to need to draw a two day to a close. However, I just want to talk about what our most important takeaways are from today. Obviously the unfolding invasion from Russia into the Ukraine is quite serious. However, I think my key takeaway from today is the technical picture in silver. We haven't seen such a strong technical setup for this metal in quite some time. So I think it'll be interesting to see how this one plays out over the next few weeks, especially as gold rallies, will silver be able to maintain its rally with copper or silver tag along and join gold's rally. What about Nick? What would be your most important takeaway from today?

Nick Frappell:

I think in metal terms. Yeah, I absolutely agree with you on the silver front. And I know that there are people who will listen and who are be interested in the silver kind of that sort of evolution of silver and the positioning. The thing that I suppose if this is a takeaway looking perhaps looking forward and just thinking more about the agricultural price impact commodities inflating there. This is a very kind of perhaps you could take quite a tenuous thing. It's certainly not a gold or hard metals thing, but rising grain prices, rising wheat prices. If they rise dramatically, of course they really impact the sort of big wheat importers. And one thing that springs to mind for example, is I believe Egypt's quite a large importer of wheat heavily subsidizes the cost of those imports because of staples in the Egyptian food market, food supply, flat breads and so on.

Nick Frappell:

So rising prices there and rising prices in food stuffs generally are often quite destabilizing things. Even in the today's world, you tend to forget that because we've been the beneficiaries of cheap food prices for so much of our lives. That it hasn't really been something that we've ever focused on, but in some countries, or in all countries is a point where high food prices begin to be destabilizing because of the sort of the there'll be social descent that arises through the inflationary effects of food. Just thinking, Egypt straddles a incredibly important trade pinch point the service canal, you don't really want problems there. I'm not saying there will be problems. There would be problems in just sort of pointing out the destabilizing effect of food prices in some countries and plenty of others where food prices have risen and they've driven instability and sometimes revolutionary change. So that's probably a wider, long term forward looking thought that's associated with some of the things we talked about earlier,

Shae Russell:

Managed to cover a lot in a small amount of time. However, given the markets are rapidly moving at the moment. I do think it's worth us coming back in seven days to cover a few more things that are happening in the market. So with that, I would like to say, Nick, thank you very much for being here.

Nick Frappell:

Thanks Shae, it's a pleasure.

Shae Russell:

Thanks for listening. Don't forget. Get a better understanding of the technical indicator Nick uses the Ichimoku cloud it's available on most trading platforms. Alternatively, you can check the show notes over at abcrefinery.com/podcast. Here, you can sign up to receive more information from Nick Frappell, including his monthly report, where he incorporates technical analysis alongside macro market commentary. That's all from us today at ABC Bullion and ABC Refinery. We look forward to seeing you next time.