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Commodity ETP Weekly: US Budget Impasse Unlikely to Be Ignored Much Longer

Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will benefit from the continuation of the global growth recovery…

    ETF Securities Research

    Copper and silver, two metals with wide industrial applications, were the primary beneficiaries of investor interest. Toward the end of last week there were tentative signs of increasing market impatience with the lack of progress. The cavalier attitude being taken by politicians about fiscal matters is leading to growing doubts about the ability of US politicians to come to a compromise that will avoid a sovereign default. With the debt limit likely to be breached around 17th October (unless extended), markets are likely to remain volatile and short term news driven over the next few weeks. In the meantime, some investors are taking the opportunity to increase positions in beaten down cyclicals. But if progress on debt negotiations maintains the current stalemate much longer, gold is likely to move back into the spotlight.

    ETFS Copper (COPA) saw US$48.6mn of inflows as the global manufacturing environment continues to improve. Inflows into COPA hit the highest level since June. ETFS Aluminium (ALUM) also attracted US$7.4mn of inflows, the highest since August. The US ISM manufacturing index rose more than expected, to a two-year high. While Chinese and European PMIs were slightly below expectations, they continue to show expansion in the manufacturing sector. With central banks across the globe maintaining the status quo, the outlook for industrial metals (and copper being the key bellwether for the sector) is positive barring any fiscal accident in the US.

    Long silver ETPs see US$45.1mn of inflows as the metal’s hybrid status generates interest in uncertain times. Silver ETPs have seen four-consecutive weeks of positive inflows. With the global economy staging a cyclical recovery, demand for silver in manufacturing is likely to continue to rise. At the same time its close correlation with gold provides investors a hedge against worst case scenarios. Because of its dual status, silver uniquely allows investors to play two apparently disparate scenarios – default or cyclical recovery.

    Flows into long natural gas ETPs rose US$7.0mn, the highest since August. As fall weather provides cooler temperatures in the US, investors positioned themselves for higher seasonal demand for gas. After prices fell from a mid-week high of US$3.61/MMBbtu to US$3.50/MMBbtu by the end of the week, investors saw a buying opportunity and are likely to continue to accumulate on price dips. With 3.5% less natural gas rigs in operation last week compared to the prior week, supply conditions are also firming up.

    Investors redeem platinum and palladium despite positive auto sector news and on-going miner strikes. ETFS Physical Platinum (PHPT) and ETFS Physical Palladium (PHPD) saw US$7mn and US$3.5mn of outflows respectively. Prices of the metals had also slipped 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14- month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day, distorting the monthly statistsics. Autocatalyts are the primary source of demand for the platinum group metals. The strike that started two weeks ago was still on-going last week at Amplats. Amplats have been losing 3,100 ounces of production a day since the beginning of the strike.

    Key events to watch this week. Investors still remain in the dark as to when key US government compiled statistics, including the non-farm payrolls data that were due last week, will eventually be released. Focus will remain on developments (or lack of them) in the US budget debate. The Federal Reserve will also release its minutes from its last meeting when it surprised the market by not tapering. The Bank of England’s policy meeting will be closely observed after Carney indicated the lack of need for further QE



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