ETP Weekly: Bargain Hunting Drives Precious Metal Flows to Eight-Week High

While precious metal prices capitulated last week, we saw strong flows into platinum, palladium and silver. Bargain hunting is clearly driving flows. With the global industrial cycle improving, demand for the more…

ETF Securities Research

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industrially dependent precious metals is likely to rise and therefore help reverse the losses these metals have sustained due to their correlation with gold. With all precious metals trading near or below their marginal cost of production, we expect mining activity to begin to be cut back, tightening supply, and supporting prices.

ETFS Physical Platinum (PHPT) sees largest inflows since 2012 while ETFS Physical Palladium (PHPD) sees highest inflows since May 2014. US$45.4mn of flows into PHPT
and US$38.9mn into PHPD  highlights  just how  attractive  investors think platinum group metals  (PGMs)  are  right  now. With their ubiquitous use in auto-catalysts and rising car demand in the US, China and Europe, demand for  PGMs  remains strong. Meanwhile unprofitable mines in South Africa are likely to continue to be shut down and the stability of exports from Russia is likely to remain a concern, which will eventually lead to upward price pressure. 

Record inflows into ETFS Aluminium (ALUM). At US$96.9mn, last week’s inflow was the highest since  the inception of ALUM in 2006. After years of depressed aluminium prices, in 2014 we have seen aluminium rise close to 19% year-to-date. Even last week when most other metal prices fell, aluminium gained 1.9%. The catalyst behind the rally has been the tightness in bauxite supply, a key input for aluminium production, following Indonesia’s ban on raw mineral exports. Over-production of aluminium in China is likely to be cut in 2015 as the government pulls back from continuously subsidising loss-making smelters, especially now given the tightness in the bauxite market.

Silver ETPs see highest inflows since February 2014. After falling close to 9% last week, silver prices reached the lowest levels since 2012. Relative to gold it is the cheapest it has been since 2009,  despite the recent declines the gold price. The upturn in the industrial cycle bodes well for the  silver  and we could see the excess supply slowly be absorbed. Inflows into silver ETPs totalled US$35.7mn last week.

Gold ETPs see first outflow in five weeks as prospects for global growth improve. US economic growth in particular looks buoyant and is likely to drive the US dollar even higher, placing downward pressure on gold in dollar terms. Gold fell 4.7% last week and the pressure on the metal could remain. We saw US$85.8mn of outflows, reversing the previous four-weeks of inflows as more investors became bearish on the metal’s prospects.

As the price of WTI fell below US$78/bbl for the first time in 3 years, flows into long WTI ETPs rose to US$24.8mn, the highest level since March 2014. The price of the WTI reacted strongly to the news that Saudi Arabia had cut prices in the US. While the OPEC cartel appears to be in disarray, with the smaller members undercutting each other’s prices in Asia, we note the cartel has survived since 1960 despite the turbulence the member countries have endured since that time. We believe the November 27th meeting could be a pivotal point to sharpen the group’s common interests, likely driving the price of oil back to levels consistent with balancing OPEC government budgets, above US$90/bbl.

Key  events to watch this week. A number of Chinese data releases including industrial production and loan growth will help investors gauge the strength of likely demand from the world’s largest consumer of commodities. Meanwhile the advance release of Q3 GDP from the Euro area could give an indication of the (lack of) strength of demand elsewhere.


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