Commodity recovery to continue although geopolitics acts as source of volatility

Commodity recovery to continue although geopolitics acts as source of volatility ETF SecuritiesCommodity recovery to continue although geopolitics acts as source of volatility

Commodities Research – Commodity recovery to continue although geopolitics acts as source of volatility

Highlights

  • Industrial metals likely to lead commodity performance in 2018 on the back of tight supply and demand continuing to rise.
  • Monetary conditions likely to weigh on gold although geopolitical risks are holding prices up for now.
  • Planned production curbs and geopolitics currently keeping oil prices high; US production likely to expand.

Commodities are in a third year of a recovery, after a five year slump. Being largely a cyclical asset class, commodities have traced the economic recovery that has gathered momentum in recent years. Global manufacturing purchasing managers indices hit a seven year high earlier this year, indicating that manufacturing order books are strong and inventories are lean, boding well for commodity-intensive demand from the industrial sector. In recent weeks the threat of a trade war has dented otherwise strong performance and we believe that as long as the threat subsides, fundamentals will supersede and allow commodities to continue to recover. For certain commodities like aluminium and oil, the threat of supply disruptions from sanctions could lead to higher prices as long as demand is not hampered by the economic uncertainty that trade wars and sanctions breed.

Asset Class Performance Ranked – 2007-2018

Source: ETF Securities, Bloomberg

Data until April 30, 2018; All returns are in USD; YTD returns are from 29 Dec 17 to 30 Apr 18; 10 Yrs returns are annualised from 29 Dec 07 to 29 Dec 17.

Data: Equity – MSCI World, Bond – Bloomberg Barclays Agg Sovereign TR Unhedged, Real Estate – EPRA/NAREIT Global, Commodity – Bloomberg All Commodities, Cash – US T-Bill 3 Mth

Historical performance is not an indication of future performance and any investments may go down in value

As highlighted below, commodities are not a homogenous, unified asset class and the performance of each subsector can be vastly different. We expect differentiated performance during 2018. Industrial metals are likely to continue to take a lead (leveraging off their cyclical nature). Meanwhile a rising interest rate environment is likely to place downward pressure on gold prices, although the metal is likely to benefit from its potential role as a haven asset. With oil prices likely to have topped out, energy prices are likely to be a drag on the wider commodity complex, if the geopolitical premium currently present dissipates. Agriculture is somewhat difficult to assess until the crop is in the ground, but based on what’s in progress, damage to the US winter wheat and West African cocoa crop could be countered by a strong rebound in sugar and coffee production, leaving that segment broadly flat.

Commodity Sector Performance Ranked – 2007-2018

Source: ETF Securities, Bloomberg Data until April 30, 2018; All returns are in USD; YTD returns are from 29 Dec 17 to 30 Apr 18; Data: Proxies for each commodity sector using Bloomberg sub-sector indices TR

Historical performance is not an indication of future performance and any investments may go down in value

Industrial metals

Most industrial metals are in a supply deficit (i.e. demand is greater than supply). Demand remains strong in an environment of economic growth, while supply has been constrained after a dearth of capital spending by miners. It is unlikely that supply will surge in the near term give the lags between project sanction and completion. Recovering miner margins are likely to see several metals come to a production balance in a couple of years, but for now the market remains tight.

Copper supply was constrained last year as the world’s top two producers Escondida in Chile and Grasberg in Indonesia underwent supply disruptions. The root causes of these disruptions have not been fully resolved. Workers at Escondida went on strike for 44 days as they were unhappy with wage negotiations. Instead of agreeing on a wage that would be palatable, Escondida used an obscure law to extend the current contract to this year. That contract expires in July 2018. Early wage negotiations have started, but there is no guarantee that an amicable outcome will be reached without further outages.

Production at Grasberg paused due to an impasse between the majority owner of the mine, Freeport McMoran Inc and the Indonesian Government who insisted that they divest 51% of their holdings of the local mine. While an agreement has been reached, the deal still needs to be financed, and it is not clear at what price. Either way, Freeport is unlikely to invest significant amounts in this mine, given its recent experience with ownership rights. With the open pit part of the mine likely to be exhausted in coming years, underground deposits will need to be developed. That will be difficult if investment is inadequate.

Alongside the strength in cyclical demand for nickel, structural changes in demand bode well for the metal. Nickel is used in battery technology, which is experiencing a boost in demand from the electric vehicle industry. In 2016, the stock of electric vehicles was around 2 million (0.2% of total stock). The International Energy Agency forecast that by 2020 there will be between 9 and 20 million electric vehicles and by 2025 there will be 40-70 million vehicles. The nickel-manganese-cobalt (NMC) cathode is the most popular cathode used in lithium-ion batteries.

The European Commission’s Joint Research Centre forecasts that NMC cathodes will grow more than other forms. By 2025, they expect NMC demand to rise from 40k tonnes in 2015 to 192k tonnes (a rise from 29% share to 48% share of the overall cathode active materials market for batteries).

Up until recently, the NMC cathode would use equal parts of nickel, manganese and cobalt, but the market is changing to a 8:1:1 ratio of the three metals (in favour of nickel). The reason for the transition is largely due to the relative scarcity of cobalt and potential supply disruptions to the metal. 60% of the world’s cobalt is mined out of the Democratic Republic of Congo (DRC), a country which lacks political and economic stability.

Although the threat of trade wars and sanctions have put into question the strength of potential demand for industrial metals and thus dented the performance of certain metals in recent weeks, the disruption to trade could equally tighten the supply of metal. That is already being played out in aluminium.

Precious metals

Gold has been a key beneficiary of the recent rise in geopolitical risk. Gold wears many hats. At times it is a monetary asset – an alternative currency to the US Dollar or Euro – whose value historically declines in periods of monetary tightening. Other times it can be seen as a safe-haven asset – the port of call for investors seeking refuge from the volatility that uncertainty breeds. Today gold is wearing that second hat. In fact for most of this year gold has been sporting its safe-haven hat. US government shutdowns, sabre-rattling between US/Japan and North Korea, the ratcheting up of a trade war between the world’s largest economies, interactions between Russia and NATO sponsors deteriorating back to cold-war tendencies, the potential return of sanctions against Iran and the proxy war between Saudi Arabia and Iran are few of the sources of investor anxiety. That’s all in the backdrop of cyclical assets experiencing periodic downward lurches after several years of serenity. In recent days the threat of military strikes in Syria have added to that anxiety.

In the absence of this second hat, we believe that gold would be trading much lower than the US$1309/oz level it was trading as of 01/05/2018 (Bloomberg). Interest rates in the US are rising, which will place downward pressure on gold prices, especially if the US is increasing rates faster than its counterparts in other countries (which could reverse the recent US Dollar weakness). In the absence of geopolitical risk, we believe that gold could decline to US$1275-US$1285/oz at the end of this year.

Energy

Oil prices have rebounded significantly from their 2016 lows of US$28/bbl. At close to US$74/bbl (01/05/2018, Bloomberg), oil prices are still far from their 2014 highs of US$115/bbl, and we believe are unlikely to reach that point in coming years. Indeed, oil is currently trading at the upper end of what we think is a viable trading range (in the absence of new supply shocks). For as much as the Organization of the Petroleum Exporting Countries (OPEC) has made progress in curbing production and reducing OECD inventories of oil, the high price environment will encourage further expansion of production from the United States. The US shale oil industry is price-sensitive and nimble. In contrast to traditional oil production which has multi-year lead times, the decision to switch on a rig in the US can lead to oil production within a matter of weeks. We expect US supply to continue to rise, which will keep a lid on prices. Meanwhile, we expect that OPEC will start to signal how it will taper its curbs on production down in 2019 at its June 2018 meeting. So there is likely to be downward pressure on prices.

However, for the time being there is a geopolitical premium on oil prices. Potential sanctions against Iran and Russia could tighten the market up more aggressively than is currently assumed. Obviously geopolitical risk can blow over as quickly as they flare up, which could remove the premium in oil. However, should the risks crystallise in actual sanctions, prices could trend higher.

Curve dynamics

When investing in commodities via futures contracts (or solutions tracking a futures contract), an investors is exposed to the price difference between an expiring contract and the new contract they roll into. Sometimes that works in the investors favour (i.e. when the new contract is cheaper than the expiring contract – referred to as backwardation) and sometimes that works against the investors (i.e. when the new contract is more expensive than the expiring contract – referred to as contango). For several years (between 2014 and 2017), the Brent futures curve was primarily in contango, which acted as a drag on performance for investors in Brent futures. A global excess supply of oil kept front month prices of oil lower than elsewhere on the futures curve. OPEC’s efforts to drain excess inventories of oil since 2017 have helped Brent oil futures move back into backwardation. Although we expect OPEC to slowly taper some of its curbs on production in 2019, we are unlikely to see a glut of inventory develop again. Therefore, unless demand suddenly declines (which we don’t expect), we are unlikely to see the Brent futures go back into contango this year and hence this source of drag on performance is likely to be mitigated.

Brent oil: front minus second month contract price

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0)207 448 4330
E research@etfsecurities.com

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This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

Gold inflows strengthen as geopolitical risks take centre stage

Gold inflows strengthen as geopolitical risks take centre stage

ETF Securities Weekly Flows Analysis – Gold inflows strengthen as geopolitical risks take centre stage

Highlights

  • Geopolitical risk drives US$33.2mn into long gold ETPs and US$13.
  • 6mn into long silver ETPs.Inflows into copper ETPs rebound with US$29.1mn inflows last week.
  • US dollar ETP positions widened for the second week in a row to US$10.2mn, as investors positioned against the Euro.

Download the complete report (.pdf)

Gold ETPs attracted the largest inflows in 23 weeks as risk aversion took centre stage amidst military activity in Syria and ongoing trade tensions. Following days of sabre rattling by Mr Trump, the US, UK and France launched a missile attack on Friday in an attempt to destroy the Assad regime’s chemical weapon capabilities in Syria. In response, Russian president Vladimir Putin condemned the attack and warned that such action would inevitably lead to chaos. As the first port of call in times of political uncertainty, we expect gold to remain in demand for as long as the conflict between the US and Russia continues on the back of the Syrian crisis. In fact, for most of this year gold has been sporting its safe-haven hat.

US government shutdowns, sabre-rattling between US/Japan and North Korea, the ratcheting up of a trade war between the world’s largest economies, interactions between Russia and NATO sponsors deteriorating back to cold-war tendencies, the potential return of sanctions against Iran and the proxy war between Saudi Arabia and Iran are few of the sources of investor anxiety. Added to that, the weaker greenback has lent buoyancy to gold prices that ended last week higher by 1%. Silver prices have also been benefiting in gold’s slipstream. Silver ETPs received US$13.6mn, marking the fifth consecutive week of inflows. We continue to have a positive view on silver’s fundamentals owing to a strong industrial cycle and constrained mine supply and expect silver to play catch-up in 2018.

Inflows into copper ETPs increase by US$29.1mn, reversing the prior two weeks’ trend of outflows. Owing to their cyclical nature, industrial metal prices have come under considerable pressure as the threat of trade wars continues. Last week Peru, the world’s second largest producer of copper after Chile, confirmed its intention to produce 3mn tons (36% up over the prior year) of copper per year by 2022. While supply has been increasing, the global copper market was in a seasonally adjusted supply deficit of 155,000 tons last year as confirmed by the International Copper Study Group (ICSG). While the deficit looks set to decrease marginally on the back of higher supply, demand remains well supported. According to data from the customs authorities, China concentrate imports were up 8% over the prior year in Q1 2018.

US dollar ETPs widened for the second week in a row to US$10.2mn, primarily as investors positioned against the Euro. The rollover of the Purchasing Managers Index (PMIs) in Europe from record highs in January coupled with weaker macro-economic data in Europe last week has dampened sentiment towards the European economic recovery. We believe, the current downturn is only reflective of a midcycle pause and expect Europe’s strong economic growth trajectory to continue.

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This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information.

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Macro outlook supports the mining sector but further upside remains muted

Macro outlook supports the mining sector but further upside remains muted

ETF Securities Equity Research: Macro outlook supports the mining sector but further upside remains muted

Highlights

  • Demand for metals remains well supported by a favourable macro-economic backdrop but China’s reform policy is expected to soften future metal demand.
  • The benefits of the weaker US dollar on higher commodity prices are outweighed by higher local currency input costs for producers in the mining sector.
  • Capex growth has turned positive for the first time in five years and the electric car revolution opens further avenues of investment for the mining sector.
  • Strict capital discipline among the miners has improved operational efficiency but miner’s valuations are not cheap.

Macro outlook supports demand

The global economy looks set to embark on a strong growth trajectory evident from the improvement in global purchasing manufacturing indices (PMI) since the second half of 2016. The optimism over global expansion increasing consumption of metals has led to a revival in the price of most metals this year. As a consequence, we have witnessed the top 100 diversified miner’s aggregate price appreciate 86% since 31 January 2016 (Source: Bloomberg).

Added to that, the current weakness of the US dollar is acting as an important catalyst in fuelling the commodity price rebound. As the world’s largest economy enters the late stage of the economic expansion cycle we expect to see tightening of the labour market combined with rising inflation, commodity prices and interest rates as the Federal Reserve normalises policy. The raw industrials index and the trade weighted US dollar tend to move inversely to each other with a negative 0.80 correlation. This counter cyclical relationship bodes well for base metal prices as investors look towards metals as a store of value versus the greenback. While the mining sector will benefit from higher commodity prices, the weaker US dollar could temper the benefits for producers that have a high proportion of costs in local currency.

China’s reforms take centre stage

A government led initiative in China’s construction industry since early 2016 underpinned the rebound of industrial metal prices. The emphasis on reforms as highlighted by President Xi at 19th National Party Congress in October 2017 suggests Chinese economic growth will gravitate more towards services and consumer spending. These activities are significantly less resource intensive and could soften demand for industrial metals. Added to that, the ongoing cooling of fiscal stimulus to the manufacturing and construction industries that kick started in H217, will further dampen new demand for industrial metals.

That being said, China’s supply side reform, to tackle environmental pollution, address unlicensed production and excess supply, resulted in significant escalation in metal prices last year. The widespread efforts improved capacity utilization rates within the aluminium, coal and steel industries. To a large extent, the impact of the capacity reductions in steel and coal appear to have already passed their peak, as the Chinese governments met their targets late last year.

Miners are back in business

After five consecutive years of negative growth in capex, total spending has finally turned positive, rising 8% since the prior year. A large part of the spending has been dedicated to sustaining production rather than expansionary projects. Miners are tapping into the new sources of growth led by technology driven innovation. At the forefront of this revolution, electric car production is expected to bolster demand for lithium, cobalt, copper and aluminium. Mining companies owning lithium and cobalt deposits are well positioned to benefit from rising demand owing to their use in battery cathodes.

Ongoing supply deficits projected

A vast variety of metals are projected to continue to extend their supply deficits into 2018 as demand outstrips supply. Declining inventory levels of global metals stocks namely – zinc, copper, aluminium, platinum, palladium and tin remain supportive of their price recovery. However deteriorating ore grades and falling reserves, make it vital for miners to undertake further exploration projects to maintain their current production.

Miners are not cheap

Owing to the challenging pricing environment between 2011 and 2016 the mining sector imposed a stricter capital discipline in an effort to shore up their balance sheet. Since mid-2016, valuations for the sector have climbed in lock step with rising profitability. Mining stocks currently trade at 17x earnings compared to the long term average of 10x, supported by higher earnings growth (Source: Bloomberg, as of 30 January 2018). Meanwhile, the current price to book ratio at 2x trades in line with its long term average of 1.7x as impairments charges reduced significantly. Recovering commodity prices, an emphasis on debt repayments and improving liquidity have helped alleviate pressure from ratings agencies as ratings outlooks for base and precious metal miners turn positive.

For more information contact:

Catarina Donat Marques
ETF Securities (UK) Limited
T +44 20 7448 4386
E catarina.donatmarques@etfsecurities.com

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This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

A short-term pull-back in industrial metals likely to open new entry points

A short-term pull-back in industrial metals likely to open new entry points

ETF Securities Commodity Research: A short-term pull-back in industrial metals likely to open new entry points

Highlights

  • Industrial metal prices have staged a strong rally as tightening supplies support fundamentals.
  • Given the long lead times in exploration and development of mines, even though capital expenditure may soon start to increase, we expect supplies to remain tight and the market is unlikely to achieve balance in the short term.
  • However, there are threats to the current rally as strong momentum could give way to a pull-back in prices. Historically periods in which trading volumes in China have risen sharply have been followed by a correction.
  • These pull-backs are usually an opportunity to shake out momentum trades and allow the market to focus on fundamentals rather than a sustained downturn.

Recovering losses

Industrial metals are staging a strong rally. Year to date, the Bloomberg Industrial Metals sub-index for example has risen 17%. Industrial metal prices last peaked in 2011 and since lost 60% by the time it hit a trough in 20161. About 34% of those losses have recovered so far in the rally that started in 2016. While zinc is currently trading higher than it was in 2011, all other metals still have not recovered to their prior levels.

Metals in a supply deficit

The demand for zinc, copper and nickel is expected to be higher than supply. These metals have gone through back-to-back years of supply deficits. Copper has been in a supply deficit for the past seven years and by 2018, the metal will have recorded nine consecutive years of stock withdrawals if the International Copper Study Group’s forecasts are correct. The lead market is broadly balanced. Aluminium could shift into a supply deficit if China follows through with its attempts to cut capacity in winter months to improve the environment (see Metal supply to tighten as environmental concerns enforced).

Increase in production unlikely soon

Since industrial metal prices began to fall in 2011, capital expenditure by miners collapsed. In mid-2017 capital expenditure by the largest 100 mines was 60% lower than in mid-2013. Given the long lag times behind investment and completion of mines, we don’t expect the tightness of mine supply to reverse any time soon.

Added to that, miners are cautious to increase spending as they wait for the price recovery to prove sustainable. Historically we have seen about a year-long lag between a recovery in price and a recovery in capital spending. Given that the rally stalled between February and June this year (before starting again), miners could exercise even more caution in this cycle.

Historically we have found that metal markets begin to move towards a balance two years after miner profit margins hit rock-bottom. Miner margins fell to a low of 2% at the beginning of 2016 and since have recovered to just over 7%. So if we see a repeat of historical patterns, we should see supply begin to improve in late 2018, but it could take years to move back into balance.

Rally sustainabilty

We believe that the tightness in the metals market provides fundamental strength to prices. However, we have observed periodic pull-backs in prices: November – December 2016 and March – June 2017, when metal prices declined close to 10% in each episode. Given the rapid 17% increase in prices since June, are we due another correction?

In November 2016 we saw the price pull-back occur shortly after volumes of trading in Chinese futures increased and subsequently fell. The price volatility was largely driven trading volatility. At the time the Chinese authorities had increased their regulatory grip on the market to stop destabilizing trades from ‘tourist’ investors from influencing the market. Given the rise in trading volumes on the Shanghai Futures Exchange in August, we could be witnessing another episode of herd-like buying that could dissipate very quickly.

We note that, while in the November 2016, pre-7am trading in LME copper surged (indicating increased buying from Asia), this time around, volumes have remained stable. However, pre- 7am LME aluminium volumes have increased alongside SHFE volumes in August.

Indeed, we could be witnessing a broader trend of Asian trading having a wider influence on LME prices. With the exception of copper once again, the share of pre-7am trading in most LME metals has been rising over the past two years.

A pull-back in prices is a likely outcome as momentum trades withdraw. However, as the fundamentals remain strong, we believe that a good entry point will open up as result.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

 

 

Tensions with North Korea to support demand for gold

Tensions with North Korea to support demand for gold

ETF Securities Weekly Flows Analysis – Tensions with North Korea to support demand for gold

  • Gold ETPs recorded the largest weekly inflows since March as tensions with North Korea escalate.
  • Short Oil ETPs recorded inflows as oil prices trade around US$50/bbl on average.
  • Inflows into copper ETPs as manufacturing activity in China grew more than expected in August.

Download the complete report (.pdf)

Investors rushed into gold ETPs as North Korea is threatening further military tests near the US seas. Last week saw US$122.5mn inflows into gold ETPs as tensions with North Korea intensify. Whilst the country has been demonstrating its military force since at least the 80’s, it has stepping up its provocations since the summer 2016 when Kim Jong-un claims that he can launch a missile capable of striking the US. Verbal provocations recently turned into military action with a North Korean missile overflying Japan on Tuesday morning. Allies have responded by another demonstration of force on Thursday as US bombers joined South Korea in a live-fire bombing exercise over South Korea. Russia and China, on the other hand, are pushing for diplomatic talks. Gold price rose by 2.6% on Tuesday, closing above US$1,318/oz., the highest level since September 2016, before ending the week at US$1,320/oz. Platinum and silver, on the other hand, recorded outflows of US$12.4mn and US$34.5mn respectively, likely on profit-taking as prices touched the highest levels since Q1 2017.

Inflows into short oil ETPs sent mix signals despite robust domestic demand for oil in the US. Hurricane Harvey which hit the US Gulf Coast damaged a third of US oil refineries, sending the price of heating oil and gasoline to the highest level since the summer 2015. The hurricane, downgraded to tropical depression, is the first category 3 to make landfall in the US since 2005. Oil prices, on the other hand, have barely moved from their current momentum. WTI fell 1.2% over the past week while Brent remains flat. Natural gas was up 6.2% over the week as the active contract rolled from September to October on Wednesday with a curve in contango. After six weeks of outflows, oil ETPs recorded US$5.8mn inflows last week, mostly into short oil ETPs, reflecting investors’ views that oil prices will remain range-bound. However, US domestic demand for oil remains strong as inventories declined more than expected last week despite production continuing to rise.

Copper ETPs recorded inflows on growing Chinese manufacturing activities in August. China manufacturing PMI surprised the market to the upside while service and non-manufacturing PMIs grew at their lowest pace in four months as construction activity slowed down. Interestingly, the Caixin manufacturing PMI, released last Friday, also confirmed a pickup in in industrial activities at 51.6 against 51 expected and 51.1 in July. While the Chinese National Bureau of Statistics data focus on large to mid-sized companies, the Caixin manufacturing PMI tracks smaller and private businesses and therefore provides an independent reading from official numbers. The price of industrial metals rose by 3.0% on average last week and 10.8% over the past month. We continue to expect Chinese data to beat expectations and support demand for metals.

Video Presentation

Edith Southammakosane, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.

For more information contact

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

General

Important Information

General

This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).

This communication is only targeted at qualified or professional investors.

The products discussed in this communication are issued by ETFS Commodity Securities Limited (”CSL”), ETFS Hedged Commodity Securities Limited (”HCSL”), ETFS Hedged Metal Securities Limited (”HMSL”), Swiss Commodity Securities Limited (”SCSL”), ETFS Foreign Exchange Limited (”FXL”), ETFS Metal Securities Limited (”MSL”), ETFS Oil Securities Limited (”OSL”), ETFS Equity Securities Limited (”ESL”), Gold Bullion Securities Limited (”GBS” and, together with CSL, HCSL, HMSL, SCSL, FXL, MSL, OSL and ESL, the ”Issuers”) and GO UCITS ETF Solutions Plc (the ”Company ”). Each Issuer (apart from SCSL) is regulated by the Jersey Financial Services Commission. The Company is an open-ended investment company with variable capital having segregated liability between its sub-funds (each a ”Fund”) and is organised under the laws of Ireland. The Company is regulated, and has been authorised as a UCITS by the Central Bank of Ireland (the ”Financial Regulator”) pursuant to the European Communities (Undertaking for Collective Investment in Transferable Securities) Regulations, 2003 (as amended).

Italy: When being made within Italy, this communication is for the exclusive use of the ”qualified investors” and its circulation among the public is prohibited.

Switzerland: In Switzerland, this communication is only intended for Regulated Qualified Investors.

US: This communication is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares in the United States or any province or territory thereof, where none of the Issuers, the Company or any securities issued by them are authorised or registered for distribution and where no prospectus for any of the Issuers or the Company has been filed with any securities commission or regulatory authority. Neither this communication nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. Neither the Issuers, the Company nor any securities issued by them have been or will be registered under the United States Securities Act of 1933 or the Investment Company Act of 1940 or qualified under any applicable state securities statutes.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. ETFS UK does not warrant or guarantee the accuracy or correctness of any information contained herein and any opinions related to product or market activity may change. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data.

Any historical performance included in this communication may be based on back testing. Back tested performance is purely hypothetical and is provided in this communication solely for informational purposes. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Historical performance is not an indication of or a guide to future performance.

The information contained in this communication is neither an offer for sale nor a solicitation of an offer to buy securities nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchaser or sale would be unlawful under the securities law of such jurisdiction. This communication should not be used as the basis for any investment decision.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

Risk Warnings

Securities issued by the Issuers and the Company may be structured products involving a significant degree of risk and may not be suitable for all types of investor. This communication is aimed at sophisticated, professional and institutional investors. Any decision to invest should be based on the information contained in the prospectus (and any supplements thereto) of the relevant Issuer or the Company which includes, inter alia, information on certain risks associated with an investment. The price of any securities may go up or down and an investor may not get back the amount invested. Securities may be priced in US Dollars, Euros, or Sterling, and the value of the investment in other currencies will be affected by exchange rate movements. Investments in the securities of the Issuers or the shares of the Company which provide a short and/or leveraged exposure are only suitable for sophisticated, professional and institutional investors who understand leveraged and compounded daily returns and are willing to magnify potential losses by comparison to investments which do not incorporate these strategies. Over periods of greater than one day, investments with a short and/or leveraged exposure do not necessarily provide investors with a return equivalent to a return from the unleveraged long or unleveraged short investments multiplied by the relevant leverage factor.

Investors should refer to the section entitled ”Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuers and the Company.

The relevant prospectus for each Issuer and the Company may be obtained from www.etfsecurities.com. Please contact ETFS UK at +44 20 7448 4330 or info@etfsecurities.com for more information.

Issuers

General: The FCA has delivered to the regulators listed below certificates of approval attesting that the prospectuses of the Issuers indicated have been drawn up in accordance with Directive 2003/71/EC.

For Dutch, French, German and Italian Investors: The prospectuses (and any supplements thereto) for each of the Issuers (apart from SCSL) have been passported from the United Kingdom into France, Germany, Italy and the Netherlands and have been filed with the l’Autorité des Marchés Financiers (AMF) in France, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in Germany, CONSOB and the Bank of Italy in Italy and the Authority Financial Markets (Autoriteit Financiële Markten) in the Netherlands. Copies of prospectuses (and any supplements thereto) and related regulatory documentation, including annual reports, can be obtained in France from HSBC France, 103, Avenue des Champs Elysées, 75008 Paris, in Germany from HSBC Trinkhaus & Burkhardt, AG, Konsortialgeschäft, Königsalle 21/23, 40212 Dusseldorf and in the Netherlands from Fortis Bank (Nederland) N.V., Rokin 55, 1012 KK Amsterdam. The prospectuses (and any supplements thereto) for each of the Issuers (apart from SCSL) may be distributed to investors in France, Germany, Italy and the Netherlands.

This communication is not a financial analysis pursuant to Section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and consequently does not meet all legal requirements to warrant the objectivity of a financial analysis and is also not subject to the ban on trading prior to the publication of a financial analysis.

This communication is not addressed to or intended directly or indirectly, to (a) any persons who do not qualify as qualified investors (gekwalificeerde beleggers) within the meaning of section 1:1 of the Dutch Financial Supervision Act as amended from time to time; and/or (b) in circumstances where other exemptions or dispensations from the prohibition the Dutch Financial Supervision Act or the Exemption Regulation of the Act on Financial Supervision apply.

None of the Issuers is required to have a license pursuant to the Dutch Financial Supervision Act as it is exempt from any licensing requirements and is not regulated by the Netherlands Authority for the Financial Markets and consequently no prudential and conduct of business supervision will be exercised.

For Austrian, Danish, Finnish, Portuguese, Spanish and Swedish Investors: The prospectuses (and any supplements thereto) for each of CSL, HCSL, HMSL, MSL, ESL and FXL have been passported from the United Kingdom into Austria, Denmark, Finland, Portugal, Spain, Sweden and have been filed with Österreichische Finanzmarktaufsicht (Austrian Financial Market Authority) in Austria, Finanstilsynet (Financial Supervisory Authority) in Denmark, Finanssivalvonta (Finnish Financial Supervisory Authority) in Finland, Comissão do Mercado de Valores Mobiliários (Portuguese Securities Market Commission) in Portugal, Comisión Nacional del Mercado de Valores (Securities Market Commission) in Spain and the Finansinspektionen (Financial Supervisory Authority) in Sweden. The prospectuses (and any supplements thereto) for these entities may be distributed to investors in Austria, Finland, Portugal, Spain, Denmark and Sweden.

For Belgian Investors: The prospectuses (and any supplements thereto) for GBS, CSL, MSL and FXL have been passported from the United Kingdom into Belgium and has been filed with the Commission Bancair, Financiére et des Assurances in Belgium. The prospectuses (and any supplements thereto) for GBS, CSL, MSL and FXL may be distributed to investors in Belgium.

For Swiss investors: The prospectus (and any supplements thereto) for SCSL may be distributed to investors in Switzerland. Securities in SCSL are not shares or units in collective investment schemes within the meaning of CISA. They have not been approved by the Swiss Financial Market Supervisory Authority (FINMA) and are not subject to its supervision. The Swiss Franc Currency-Hedged Commodity Securities are not issued or guaranteed by a supervised financial intermediary within the meaning of CISA.

This document does not constitute a prospectus under the Companies (Jersey) Law 1991 and is not an offer or an invitation to acquire securities in SCSL. This document does not constitute a Swiss listing prospectus under the SIX Listing Rules and the SIX Additional Rules for the listing of Exchange Traded Products. This document must be read in conjunction with the Swiss Listing Prospectus. If there is any inconsistency between this document and the Swiss Listing Prospectus, the Swiss Listing Prospectus shall prevail. Detailed information on the terms and conditions of the Swiss Franc Currency-Hedged Commodity Securities can be found in the Swiss Listing Prospectus under Part 6 – Trust Instrument and Swiss Franc Currency-Hedged Commodity Securities.

Other than as set out above investors may contact ETFS UK at +44 (0)20 7448 4330 or at info@etfsecurities.com to obtain copies of prospectuses and related regulatory documentation, including annual reports. Other than as separately indicated, this communication is being made on a ”private placement” basis and is intended solely for the professional / institutional recipient to which it is delivered.

Securities issued by the Issuers are direct, limited recourse obligations of the relevant Issuer alone and are not obligations of or guaranteed by any of UBS AG (”UBS”), Merrill Lynch Commodities Inc. (”MLCI”), Merrill Lynch International (”MLI”), Bank of America Corporation (”BAC”), Bloomberg Finance LP (”Bloomberg”), Société Générale (”SG ”), Shell Trading Switzerland, Shell Treasury, HSBC Bank plc, JP Morgan Chase Bank, N.A., Morgan Stanley & Co International plc, Morgan Stanley & Co. Incorporated or any of their affiliates or anyone else or any of their affiliates. Each of UBS, MLCI, MLI, BAC, Bloomberg, SG, Shell Trading Switzerland, Shell Treasury, HSBC Bank plc, JP Morgan Chase Bank, N.A., Morgan Stanley & Co International plc and Morgan Stanley & Co. Incorporated disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might have in respect of this communication or its contents otherwise arising in connection herewith.

Funds

Austria: Investors should base their investment decision only on the relevant prospectus of the Company, the Key Investor Information Document, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association, which can be obtained free of charge upon request at the Paying and Information Agent in Austria, Erste Bank der oesterreichischen Sparkassen AG, Graben 21, A1010 Wien, Österreich and on www.etfsecurities.com.

France: Any subscription for shares of the Funds will be made on the basis of the terms of the prospectus, the simplified prospectus and any supplements or addenda thereto. The Company is a UCITS governed by Irish legislation and approved by the Financial Regulator as UCITS compliant with European regulations although may not have to comply with the same rules as those applicable to a similar product approved in France. Certain of the Funds have been registered for marketing in France by the Authority Financial Markets (Autorité des Marchés Financiers) and may be distributed to investors in France. Copies of all documents (i.e. the prospectus (including any supplements or addenda thereto, the Key Investor Information Document, the latest annual reports and the memorandum of incorporation and articles of association) are available in France, free of charge, at the French Centralizing Agent, Société Générale, Securities Services, at 1-5 rue du Débarcadère, 92700 Colombes – France. Germany: The offering of the Shares of the Fund has been notified to the German Financial Services Supervisory Authority (BaFin) in accordance with section 310 of the German Investment Code (KAGB). Copies of all documents (i.e. the Key Investor Information Document (in the German language), the prospectus, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association) can be obtained free of charge upon request at the Paying and Information Agent in Germany, HSBC Trinkaus & Burkhardt AG, Königsallee 21-23, 40212 Düsseldorf and on www.etfsecurities.com. The current offering and redemption prices as well as the net asset value and possible notifications of the investors can also be requested free of charge at the same address. In Germany the Shares will be settled as co-owner shares in a Global Bearer certificate issued by Clearstream Banking AG. This type of settlement only occurs in Germany because there is no direct link between the English and German clearing and settlement systems CREST and Clearstream. For this reason the ISIN used for trading of the Shares in Germany differs from the ISIN used in other countries.

Netherlands: Each Fund has been registered with the Netherlands Authority for the Financial Markets following the UCITS passport-procedure pursuant to section 2:72 of the Dutch Financial Supervision Act.

United Kingdom: Each Fund is a recognised scheme under section 264 of the Financial Services and Markets Act 2000 and so the prospectus may be distributed to investors in the United Kingdom. Copies of all documents (i.e. the Key Investor Information Document, the prospectus, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association) are available in the United Kingdom from www.etfsecurities.com.

None of the index providers of the Funds referred to herein nor their licensors make any warranty or representation whatsoever either as to the results obtained from use of the relevant indices and/or the figures at which such indices stand at any particular day or otherwise. None of the index providers shall be liable to any person for any errors or significant delays in the relevant indices nor shall be under any obligation to advise any person of any error or significant delay therein.