Ukraine Tensions May Benefit Commodities Bulls

Recent tensions Ukraine have faded from the headlines in the last few weeks, but these events should not disappear from the radar of investors, as there is little reason to expect a clear resolution anytime soon.

Apr 17, 2014 at 11:25AM

Investors who focus on the commodities space tend to spend most of their time analyzing supply and demand factors that are likely to influence market prices. But it is also important to remember that the momentum in long-term trends is often generated by sentiment and geopolitical factors that drive investors away from other asset classes. Recent tensions in Ukraine have faded from the headlines in the last few weeks, but these events should not disappear from the radar of investors, as there is little reason to expect a definite resolution anytime soon. Confrontations between the Ukrainian military and pro-Russian activists have put these issues back at the forefront, and this will continue to impact price moves in commodities.

More specifically, it will be important to watch the activity in precious metals and energy markets, as both should continue to be bullishly influenced by what is happening in Ukraine -- albeit for entirely different reasons. We have already seen renewed spikes in ETFs tied to precious metals and energy markets, and the rising tensions mean that investors should be positioning for extended moves in these areas. In precious metals, the best gauges for sector performance can be found in the SPDR Gold Trust (NYSEMKT:GLD) and the iShares Silver Trust (NYSEMKT:SLV). In energy markets, most of the activity has been centered on oil and natural gas. This means commodities investors should also be adding the United States Oil Fund LP (NYSEMKT:USO) and the United States Natural Gas Fund (NYSEMKT:UNG) to this watch list.

Safe-haven plays
In the trading of the silver and gold ETFs, supply and demand influences have taken a back seat to the broader sentiment levels that are driving market valuations. Gold and silver are seen as protective assets to be bought during times of geopolitical uncertainty. This means that the upward moves in the SPDR Gold Trust and the iShares Silver Trust should continue so long as military conflicts in Ukraine continue. Market valuations in the underlying gold price have already surged above $1,300 per ounce. But we are still well off the yearly highs, so there is room for an extended bull move in the metal. Price moves in gold tend to be closely mimicked by silver, so we can reasonably expect positive trends in the SPDR Gold Trust to be followed by similar activity in the iShares Silver Trust.

Trade disruptions
These same rules will not apply to the energy space. But we can expect some clear similarities with respect to the overall direction. Bullish moves in both oil and natural gas have (and will continue) to be based on the increased potential for trade disruptions in both of these assets. In this way, the Ukrainian influence on the United States Oil Fund LP and the United States Natural Gas Fund will be more traditional in nature, as possible declines in supply should lead to defensive positioning in long trades. It must be remembered here that Russia is still the world's largest energy-producer, and the potential for uncertainty in the production chain creates a bullish framework for those looking to gain exposure to oil and natural gas.

According to an estimate by BP, Russia supplies one-third of Russia's natural gas and one-quarter of its oil and coal, so the supply concerns here are well-founded. Suggestions of U.S. and EU sanctions increase the potential for Russian export restrictions and thus rising energy prices. Of course, a resolution in these conflicts could send all of these markets in the opposite direction. But while there is no guarantee of a continued bull trend in these commodities ETFs, there is significant reason to believe that the Ukrainian situation will drive the next major move in this space. Watch developments here closely.

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