ETP Weekly : Ukraine war risk drives demand for Gold, Palladium and Nickel ETPs

Commodity ETPs continued to see large inflows last week. Precious metals saw especially strong demand with Russia’s invasion of Ukraine raising fears of broader war and western sanctions on Russia…..

ETF Securities Research

Investors are being reminded of gold’s use as an insurance asset, with Russia’s unpredictable behavior in Ukraine raising demand for risk hedges. Palladium and nickel ETP demand has also increased on concerns that if the west puts trade sanctions on Russia, the world will lose access to a key supplier of both palladium and Nickel.
South Africa’s strikes entered their 7th week, adding to concerns about both platinum and palladium supplies.
Long platinum and palladium ETPs see the biggest combined inflows since June,  totalling US$54.2mn, on supply concerns. Talks aimed at ending the strike that has  halted South Africa PGM industry for over 6 weeks collapsed on Wednesday last week. So  far, the strikes have taken about 320,000 ounces off the market, equivalent to almost 6% of 2013 global platinum production. The price of platinum has started reacting to the prolonged  strike as producers’ stocks are fast approaching depletion. At the same time, concerns that  Russia may face trade restrictions following its invasion of the Ukraine helped support the  palladium price last week. With over 40% of world supply of palladium produced in Russia, any restrictions on Russian palladium exports would exacerbate what is already expected to be a large palladium deficit in 2014.
Long gold ETPs see inflows for the fourth consecutive week. Interest in gold continued last week with inflows of US$28mn, on the back of the Ukraine’s crisis. Members of parliament in the Crimea region voted to put joining Russia to a referendum to be held on March 16. Meanwhile, investors sought protection against recent emerging market jitters and ongoing geo-political turbulence, with the gold price trading at its highest level since October.
ETFS Nickel (NICK) receives US$8.1mn of inflows as price jumps to 9-month high.
Indonesia’s export ban is starting to produce an impact on nickel market, with Chinese stockpiles rumoured to be decreasing quickly. Worries over potential trade sanctions to be imposed on Russia also contributed to buoy prices last week as Russia is the 3rd biggest mine producer of the metal (as of 2012 data).
Long Coffee ETPs see US$56.5mn of outflows on profit taking. Coffee prices rose to a two-year high last week on concerns a drought in Brazil will reduce the crop in the world’s biggest producer. Brazil’s Southeast region is seeing the driest summer since 1972, according to the National Institute of Meteorology. However, given the extremely sharp price rise in such a short space of time and net longs in the futures markets looking highly stretched, the risk of a correction is very high in our view.
ETFS Longer Dated Lean Hogs ETP (HOGF) sees US$5.9mn of inflows as a swine disease hurts supply. Since the start of the year prices have gained almost 30% as a virus that is spreading across hog farms has drastically reduced availability for ready to slaughter hogs. With the peak consumer season in the US fast approaching, prices might continue to see upside potential.
Key events to watch this week.  Following disappointing February Chinese export data (hurt by an artificially high y-o-y base due to suspected export over-invoicing last year), investors will be closely monitoring key Chinese statistics coming out this week including aggregate financing, retail sales and industrial production. Industrial production figures for the Eurozone, UK and India will also be watched closely to assess the strength of the recovery in those economies.




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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