The longer the Fed postpones its second rate hike, the greater the support for gold….
– Silver ETPs benefit from strong ties to gold, with second consecutive weekly inflows.
– Net inflows in long USD ETPs suggest investors wary of rate hike ahead of the next Fed meeting.
Gold ETPs recorded net inflows of US$116mn following more disappointing US economic data. Although the Fed chairwoman said at the Jackson Hole Symposium that the case for a rate hike has strengthened recently, weaker-than-expected jobs and services sector data provided more reasons for the Fed to not increase interest rates at its meeting on September 20. Net speculative long positions in gold futures rebounded 13.2% last week, after reaching a 12-week low the previous week. At the same time, the probability for a rate hike in September fell from 42% following Yellen speech at the Jackson Hole to 28% last Thursday. However, Fed’s Rosengren warned last Friday on the rising risks of low interest rates on the US economy pushing the odds to 30% and weighing on the price of gold, down 1% on that day. We expect the price of gold to reach US$1,440/oz. by June 2017.
Silver continue to benefit from its safe haven property. Last week saw net inflows of US$16mn into silver ETPs for the second consecutive week, benefitting from the popularity of gold. Net speculative long positions in silver futures also rose for the second consecutive week last week, by 5.5% to 2.3 times above the 5-year average. Silver has had a stronger rally than gold year-to-date, up 40% compared to 26% for gold. Subsequently, the gold/silver ratio dropped 11% over the same period and now stands 11% above its historical average. This potentially indicates that silver catch-up as safe haven may be near the end with further upside potential likely to lie more on the demand for the metal’s industrial properties.
USD gained traction last week ahead of the next Fed meeting. Weaker-thanexpected non-farm payroll enabled the USD to close in a positive territory the previous week, up 0.3%. However, the currency fell again last week by 0.5%, prompting net inflows into long USD short EUR ETPs ahead of the Fed meeting in September 20. This suggests that investors still expect a rate hike from the Fed this year, fuelled by Fed’s Rosengren’s testimony last Friday.
Continued interest in a broad exposure to commodities. Last week saw investors adding US$13mn of positive flows into broad commodity ETPs. The uncertainty on when the Fed will eventually hike rates and the future relationship between the EU and UK is pushing investors to consider exposure to asset classes other than equities and bonds. Commodities are known for its diversification benefit in a portfolio. The Bloomberg Commodity Index 3 Month Forward Total Return rose 8% year to date.
Key events to watch this week. Investors will be listening to the Bank of England rate decision this Thursday, a potential non-event as Governor Carney indicated last week that another rate cut is in the agenda for November meeting. ECB president Draghi is also scheduled to speak on Thursday while preliminary market confidence data for September are released for the US and for Germany.