ETP Weekly: gold ETPS see largest inflows in five months

Investors raised their holdings of gold ETPs by the most in five months last week as the metal regained its reputation as a portfolio hedge as emerging markets continue to face turmoil…….

ETF Securities Research

Continued tapering by the Fed has added pressure on emerging markets dependent on foreign capital flows. At its current pace of $10bn per meeting, liquidity injections will end by the end of 2014. With a number of emerging market policymakersexpressing concern over un-coordinated exit from stimulus in the developed world, investors are likely to continue to see the value in gold as a hedge against the global recovery derailing. Gold has outperformed equities so far in 2014, which may provide further attraction for investors. Meanwhile, another sharp dip in temperatures in the US caused energy storage drawdowns, which prompted price hikes across the sector.
Industrial metals remained pressured as weaker-than-expected manufacturing surveys in China set-back sentiment. However, while survey data has softened, actual economic activity remains robust and should provide a backstop for commodity prices.
Long gold ETPs see largest inflows since August 2013 as it regained its safe haven status. Long gold ETPs saw US$44.0mn of inflows, mainly in the physically-backed products. Following the sharp depreciation of the Argentine peso and Turkish lira in recent weeks and less monetary stimulus from the Fed, we are likely to see further flows out of emerging markets and gold is likely to be a key beneficiary given its risk-off hedge status.
Gold purchases in China rose 51% in December, taking net imports of the metal to 1,108.8 tonnes in 2013 (a 33% rise over 2012).
Long natural gas ETPs see US$40.9mn of outflows on profit-taking and shorts rise after price rise to a four year high. The Henry Hub gas price benchmark rose on the back of extreme cold temperatures in the US which drove sharp storage withdrawals. Historically, February marks the beginning of a period of a seasonal decline in natural gas consumption.
As investors position for the decline in demand they withdrew their elevated long positions and placed US$9.1mn in short ETP positions, the highest since June 2011.
ETFS Physical Platinum (PHPT) received US$7.3mn of inflows as South Africa mining strikes spread. The National Union of Metalworkers of South Africa (NUMSA) said that its members will stage a strike at Anglo American Platinum’s (Amplats’) mines. While members of the Association of Mineworkers and Construction Union (AMCU) had already been striking since January 23rdat Amplats mines were able continue operations. The NUMSA strike will therefore have a material impact on output, given its majority position.
ETFS Copper (COPA) led the general trend of outflows in base metals with US$14.8mn of redemptions.  As Chinese manufacturing PMIs softened further this month, investors’ cut positions in base metals. Some base metals benefited from Indonesia’s ban on mineral exports earlier this year, but enthusiasm was trimmed after the market realised that sufficient stockpiling the minerals in China should avoid any near -term shortage.
Cocoa and coffee prices rose 4.3% and 4.2% respectively, attracting US$0.4mn of inflows into the former, while profit-taking lead to US$1.1mn of outflows in the latter. Hotter than normal weather in Brazil is negatively affecting Arabica coffee crop expectations, forcing short investors to cover their positions.
Key events to watch this week. After a disappointing US payrolls release last month, all eyes will be on this week’s release to see if it was a start of trend or an aberration. The BoE and ECB is due to have policy meetings this week, with the later possible adding clarity to its forward guidance amid a faster-than-expected recovery in the labour market. PMI/ISM releases from the EU, US and UK will provide a guide to pace of the economic recovery.

Source: ETFWorld.co.uk

Commodities 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.
Equities 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.
Currencies 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.