The gold price rebounded at the end of last week as the risks of a temporary US government shutdown rose sharply on continued lack of progress in negotiations between Congressional Republicans and Democrats. The gold price and…
ETF Securities Research
US dollar weakness have been given further impetus due to lack of further progress over the weekend. The extreme division between the two groups also raises the risk that policy mistakes lead to a possible US debt default as soon as next month if the parties cannot come to a compromise and raise the US government debt ceiling. In this highly uncertain environment the US dollar is likely to remain under pressure and gold and other perceived safe havens well bid. Ultimately, however, we believe these issues will be resolved. Therefore for investors with a medium-term time horizon we continue to expect more cyclical commodities such as copper and the PGMs to outperform, as recovering global industrial demand and continued easy money support cyclical assets.
Long silver ETPs see US$15mn of inflows as contrarian investors weigh in Silver was the worst performing metal last week as US political uncertainty led to a knee-jerk sell-off of cyclical assets. However, silver’s hybrid nature makes it potentially interesting now. With around 50% of silver demand derived from the industrial sector, silver should benefit if the global industrial cycle continues to improve. At the same time, its relatively high correlation to gold and due to its historical use as an alternative “hard currency” means that ultimately it should benefit if sovereign debt and currency debasement concerns continue to rise. With silver now trading near its all-in cost of production following one of its worst years since the aftermath of the Hunt brothers doomed attempt to corner the silver market, and net speculative futures positioning more than 50% below 2011 highs, silver appears to be attracting contrarian investors.
ETFS All commodities (AIGC) receives US$11mn of inflows as China data continues to improve. Continued strong data from China indicating the industrial cycle continues to rebound appears to have attracted investors to broad commodities, with AIGC seeing $11mn of inflows. In particular the PMI readings have been showing continued improvement as have key import and investment figures.
ETFS Longer Dated Industrial Metals (FIND) sees US$11mn of outflows as investors rotate towards individual metal exposure. Most industrial metals saw inflows last week on increased Chinese appetite for raw materials. Expectations of strong demand from China’s construction sector drove US$2.9mn of inflows into long zinc ETPs. While the zinc market is expected to remain reasonably well balanced over 2013 and 2014, a pick-up in Chinese steel production (zinc is used to galvanise steel) could raise prices. At the same time, ETFS Daily Short Aluminium (SALU) received US$2.4mn of inflows as nine years of surpluses have created a glut in the market that is likely to keep substantial downward pressure on prices.
Oil ETCs see US$19mn of outflows on easing geopolitical tensions and plentiful supply in the market. The majority of the outflows came from ETFS Daily Short WTI Crude Oil (SOIL) as WTI prices dropped to a 3-month low. Although the situations in Egypt, Syria and Iran are still far from resolved, the political risk premium has largely been withdrawn from the market over the past couple of weeks.
Key events to watch this week. This week, the focus will likely remain on the potential for a US federal shutdown. Cyclical commodities are likely to be temporarily weighed down by the increased riskiness while precious metals could benefit. A number of official PMIs will be released this week, providing guidance on the strength of the global recovery. Although no changes are foreseen, the ECB rate decision will be watched closely for any signs of a turn in policy. US non-farm payrolls will conclude the week and any strengthening will be seen as a trigger for early tapering by the Fed.