ETP Weekly : gold ETFs see 2nd consecutive week of inflows on growing risk event concerns

Commodity prices saw broad gains last week, as the turbulence in emerging markets largely calmed down. While there has been some uncertainty created by the softer US economic data this year, we expect the extreme cold weather experienced so far this winter……

ETF Securities Research

to abate in coming months and the pace of the US economic recovery to strengthen. Investors continue to favour gold ETPs as a hedge against potential tail risks and agricultural commodities are also attracting inflows as investors are tactically positioning themselves for gains ahead of the sowing season. Coffee, natural gas and WTI oil ETPs after strong price jumps last week saw profit-taking selling, with some investors starting to build positions in short natural gas and short coffee ETPs.

Long gold ETPs see 2nd consecutive week of inflows, with net buying up $46mn, as investors seek hedges against possible risk events. ETF Securities long gold ETPs last week saw $38mn of inflows, bringing inflows over the past two weeks to $46mn. The gold price has rallied over 9% this year on global growth and risk concerns and it appears investors are again recognizing gold’s use as a risk hedge. Separately, according to the World Gold Council’s 2013 Gold Demand Trends report released last week, 2013 was a record year for gold consumer demand, with demand reaching a record 3,864 tonnes as lower prices prompted buying. However, ETFs saw outflows of 881 tonnes, weighing on overall demand. Meanwhile, China surpassed India as the biggest consumer of gold last year, as demand from the latter was held back by the introduction of import duties, import quotas and other restrictions. Platinum ETPs received US$2.5mn of inflows, as labour unrest in South Africa continues. We are now 23 working days into the strike and producers should only have a few weeks of stocks left. So far 230,000 ounces of production have been taken off the market, equivalent to almost 4% of 2013 global platinum supply. Should the strikes persist for a few more weeks, the price of platinum could react strongly.

Investors redeem US$28mn of long coffee ETPs as Arabica price jumps over 20% in a week. Hot dry weather in Brazil coupled with expectations of low production from the country (which is the biggest producer of the commodity), lifted prices to October 2012 levels. However, recent strength appears excessive and could see prices fall if weather forecasts improve. Some investors have already turned negative, with ETFS Daily Short Coffee (SCFE) receiving US$3.8mn last week. Meanwhile, both corn and wheat ETPs received strong inflows last week, totalling US$5.8mn and US$3.2mn respectively, as the USDA revised acreage for grains downwards, lifting prices.

Investors turn increasingly negative natural gas price as the US Henry Hub price surges to a five-year high. Long natural gas ETPs saw US$9mn of outflows while short natural gas ETPs recorded US$6.4mn of inflows last week on expectations warmer weather will curb demand for gas. At the same time, profit taking drove US$11.3mn of outflows from long WTI crude ETPs last week. While total US oil inventories rose more-than-expected last week, stockpiles at Cushing, the WTI delivery hub, plunged for the second week in a row, adding support to the price of WTI crude.

Key events to watch this week. A number of Q4 GDP releases will be coming out this week, with Germany, the UK and the US likely to be in focus. Yellen’s testimony in front of Senate will also be watched as investors are “all ears” for any possible change in policy.

Note: All flow and AUM data in this report are based on ETF Securities ETPs to 20 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.

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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.

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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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