ETP Weekly: Investors add to gold holdings to hedge risk of Ukrainian conflict escalation

Gold ETPs saw their second consecutive week of inflows as the crisis in eastern Ukraine shows no sign of diminishing. US Secretary of State John Kerry accused Russia of « distraction, deception and destabilisation » in eastern Ukraine, in a strongly worded statement requesting Russia….

ETF Securities Research

threaten to disrupt the supply of these commodities. Russia is one of the world’s largest oil producers and third largest nickel producer, producing 13% of global supplies of each commodity. Industrial metal prices rose across the board as market participants are realising that supply is markedly tighter than most had previously assumed. The International Copper Study Group for example, which had forecast a copper surplus in 2014, conceded that the January balance was a sizable deficit of 23k tonnes compared to a 131k tonne surplus this time last year.

ETFS Physical Gold (PHAU) received US$10.3mn of inflows last week, adding to the US$82.9mn of inflows the week before. Flow into physical gold ETPs that week (of US$91.5mn) was highest since March 2013. The US$82.9mn from two weeks ago had been the highest inflow into PHAU since September 2012, highlighting investor anxiety about the escalating situation in eastern Ukraine and resurgence in insurance-asset demand. Gold is also gaining traction as a portfolio diversifier as equity markets have displayed their sensitivity to emerging market headwinds. While gold prices fell in the early part of last week, on Thursday the spot price rose 0.7%.

ETFS WTI Crude Oil (CRUD) received US$6.5mn of inflows as WTI’s discount to Brent widened to a five-week high. Last week’s inflows were the highest for CRUD in five weeks. While the Brent price seems to have gained more support from the eastern Ukraine conflict, a build in inventories of US crude and ongoing US Strategic reserve sales weighed on WTI last week. Enterprise Products Partners committed to doubling the Seaway pipeline capacity linking Cushing and Houston in the first half of 2014, which could help reduce stocks and provide a lift to WTI prices.

ETFS Nickel (NICK) sees modest selling as some investors’ book profits after a 32% rally in 2014. Driven mostly by the Ukraine-Russia conflict and in part by some fearing that an El Niño weather pattern could threaten supplies from Indonesia further, the price of nickel rose again last week. In the 2009-2010 El Niño event, nickel rose 120% in the 12 months to March 2010 as weather disrupted supplies from Indonesia, the largest producer. However, given the country’s self-imposed ban on nickel ore exports, weather disruption is unlikely to make a material difference on already tight supplies this time around.

ETFS Daily Leveraged Platinum (LPLA) inflows rose to four-week high as a perceived attractive entry point opened up. The platinum price fell early last week as market participants expected the 13-week long stalemate between South African miners and its employees to come to an end. However, in a statement published late on Thursday, Anglo American Platinum Limited (Amplats), Impala Platinum Holdings Limited (Implats) and Lonmin Plc (Lonmin) said that no resolution was found. Amplats’ production dropped by 39% in the first 3 months of the year compared to same period last year. We remain long-term bullish on platinum group metals and believe that China’s renewed environmental protection act announced last week (the first change since 1989), will bode well for PGMs, which are highly utilised in pollution abatement technology.

Key events to watch this week. US Q1 GDP, the FOMC policy announcement and change in US non-farm payrolls will be the focus in terms of scheduled releases. Markets will be strongly affected by developments in Ukraine and wage negotiations in South Africa.


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