ORO Gold

ETP Weekly: Cyclicals return to favour as emerging market rout abates

 As turbulence in emerging markets calmed, investors reduced positions in defensive assets such as gold and increased allocations to more cyclical assets such as silver, nickel, tin and lead. However, disappointing US jobs figures, below-expectations ISM manufacturing figures . ……

ETF Securities Research


and falling euro area retail sales served as a reminder that the global recovery remains fragile. Gold prices ended the week higher and will likely encourage more investors to increase allocations to the metal as it serves as a hedge against any potential stumbles on the growth recovery path. The European Central Bank emphasised in its post-policy conference that its stands ready to cut rates should economic data continue to weaken and place further disinflationary pressure. As the US Federal Reserve reduces its quantity of monthly stimuli, the ECBs reassurances were welcomed by the market and proved positive for cyclical assets.

Long gold ETPs saw US$107mn of outflows as investors turned to cyclicals and away from defensive assets. Last week’s outflows mark a break from the prior week when turbulence in emerging markets led to US$44mn of inflows. The outflows were the largest from gold ETPs since November 2013.

ETFS Physical Silver (PHAG) saw the highest inflows in four months as its price rebounded 3.8%. US$21mn of inflows into PHAG marked the highest level since October 2013. Silver, which has many industrial applications, is a cyclical precious metal and its price had risen alongside industrial metals such as copper, nickel, zinc and tin last week.

US$34.4mn of redemptions from ETFS Copper (COPA) trimmed the year-to-date inflows into copper ETPs to $47.8mn. Flows into copper ETPs have been generally strong this year so far, as investors have become sceptical about the estimates of supply surplus from many analysts that had dampened sentiment last year. Investors took profit last week as the price rose, marking the highest outflows since December 2013.

Henry Hub natural gas prices traded a volatile range last week, driving US$7.9mn out of ETFS Daily Leveraged Natural Gas (LNGA). The US gas price benchmark rose to $5.74/mmbtu before dropping precipitously to $4.99/mmbtu in one day last week. The benchmark ended the week around $4.8/mmbtu. Long positions had built up in the commodity after some investors feared supply shortages due to a colder-than-normal winter in the US. However, the violent price moves led to investors trimming positions and allocating US$4.1mn into ETFS Daily Short Natural Gas (SNGA).

Investors withdrew US$15.1mn from coffee ETPs as dry Brazilian weather prompts 13% surge in Arabica coffee prices last week. The lack of rainfall in Brazil’s main coffee growing areas (which produce 45% of world Arabica coffee) has decreased expectations of output during the 2014/15 coffee year , encouraging investors to take profits. Prices had fallen to a seven year low in November 2013 and active measures to reduce output such as hard-pruning of coffee bushes and cutting back on planting is expected to address the supply glut. Meanwhile, Sugar ETPs received US$2.2mn of inflows as prices rose 5.7%. Doubts about India being able to export its supply glut of sugar and dry weather in Brazil sent the price of sugar higher.

Key events to watch this week. Chinese trade, loan and inflation data will be closely watched for developments in the world’s largest consumer of industrial metals. The Bank of England’s release of its Inflation Report could be accompanied by clarification on its forward guidance as we advance on the 7% unemployment level that it considered consistent with raising interest rates. The release of the USDA’s World Agricultural Supply and Demand report will also provide clarity as to the effect of the unseasonably cold weather.

Note: All flow and AUM data in this report are based on ETF Securities ETPs to 6 February 2014 and are denominated in USD unless otherwise indicated.




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 either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 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 statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.

    MA Weekly 07.10.13 1


US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.

MA Weekly 07.10.13 2


Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.

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