Although the end of the Fed’s bond-buying programme was widely anticipated, commodity prices reacted strongly on the news, with gold falling below the US$1,200oz threshold and silver trading below US$16oz….
ETF Securities Research
Unsurprisingly, ETP investors considered the correction as an opportunity to increase their gold holdings, with inflows into gold ETPs reaching a 7-week high. With many commodities trading so close to their marginal cost of production, we believe that prices cannot fall much lower without triggering a supply response.
Inflows into gold ETPs reach seven week high as price falls below US$1,200oz. Long gold ETPs saw US$30mn of inflows last week, bringing the total inflows for the month to US$80mn. A surprisingly hawkish FOMC meeting on Wednesday prompted a correction in the gold price, which fell below the US$1,200 threshold. The Federal Reserve ended its monthly bond purchase program last week, dismissing current market volatility as transitory and focused on an improving labour market. Investors bought on the correction. Long oil ETPs continue to see inflows as low prices attract bargain hunters. Weak global demand for oil and distillates combined with ample global supply of crude sent both Brent and WTI prices to the lowest since November 2010 for Brent and June 2012 for WTI.
While OPEC has historically played a fundamental role in keeping oil prices above US$100, OPEC members entered a price war in October, selling their oil at a discount in order to increase market share in Asia, putting further downward pressure on both oil benchmarks. According to OPEC’s Secretary General, US shale oil producers will be the most hurt by persistently low oil prices while OPEC will be broadly unaffected. While the IEA has indicated that most oil produced is still economic at US$80/barrel, the key to greater support in oil prices lies with OPEC.
ETFS Nickel (NICK) records US$8.1mn of inflows as investors deem recent sell-off overdone. This is the largest inflow since July 2014. Nickel price is currently trading at a 15% discount to its marginal cost of production. While in the short-term companies and mines can continue to produce even if prices are trading below marginal costs, it is not sustainable in the long term. Elevated inventories and fears of a slowdown in China’s demand have weighed on prices recently. However, demand for stainless steel, the largest market for refined nickel, has picked up substantially in 2014 and we expect nickel stockpiles will start to reduce in coming months. At the same time, profit taking prompted US$7mn of outflows from long copper ETPs as the price increased over 4% from the October lows.
ETFS Soybeans (SOYB) sees the biggest inflows in over 2 years as US railroad jams slowed deliveries. 70% of the crop has already been harvested and it is waiting to be delivered but insufficient transport capacity is delaying the process. Soybean prices rose over 3% on the news. While the International Grain Organisation revised its crop expectations for the 2014/2015 season down due to delayed planting in South America, it still anticipates a record crop next year. With grains priced for perfect growing conditions, any small setback in weather in major producing countries or hiccup during the harvesting process could drive a price rally.
Key events to watch this week. This week the focus will once again be on monetary policy, with Bank of England and the European Central Bank holding their monthly meetings this week. While no changes are expected, it will be interesting to gather the BOE and ECB’s assessment of the strength of their economies.