Precious metal ETP flows strengthen as trade tensions continue

Precious metal ETP flows strengthen as trade tensions continue ETF SecuritiesPrecious metal ETP flows strengthen as trade tensions continue

ETF Securities Weekly Flows Analysis – Precious metal ETP flows strengthen as trade tensions continue

Highlights

  • Bargain hunters continued to drive strong inflows into gold ETPs – worth US$16.1mn – supported by ongoing trade tensions and geopolitical risks.
  • Crude oil ETPs faced redemptions worth US$32.7mn, the highest level in five weeks, on the back of profit taking as oil prices rose for the second week in a row.
  • Outflows from nickel ETPs widened the most in 3 weeks as prices rose over concerns of further US sanctions on Russia.

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Bargain hunters drove US$16.1mn of inflows in gold ETPs, marking two consecutive weeks of inflows. Gold prices came under pressure as bond yields rose sharply. The yield on the 10-year Treasury, rose to 2.96% the highest it’s been since January 2014 following supportive comments by the Fed governor Lael Brainard, for continued gradual increases in the Federal Funds rate. Added to that, the Federal Reserve Beige book showed a solid outlook for the US economy, while noting concerns over a potential trade war. Silver ETPs received US$12.8mn, marking the fifth consecutive week of inflows. Silver prices were lifted higher by industrial metals strong performance last week and managed to outperform gold by a strong margin of 3.5%. The gold/silver ratio for a time reached 78, its lowest level since early January.

Crude oil ETPs faced redemptions worth US$32.7mn, the highest level in five weeks, on the back of profit taking. Brent crude oil price reached US$74 per barrel last week, a level last seen in November 2014. The price appreciation has been supported by a trifecta of reasons – the decline of US crude oil inventory by 1mn barrels reported by the American Petroleum Institute (API), OPEC’s commitment to production cuts and ongoing geopolitical tensions. According to the Joint Technical Committee (JTC) of those OPEC and non-OPEC countries participating in the cuts, the oversupply in the oil market is nearly over. OECD stocks are likely to dip below the five year average over the coming quarter. Prices eased a little on Friday as President Trump accused OPEC of driving up oil prices artificially. This accusation comes at a critical time for Saudi Arabia. The country needs a high oil price ahead of an IPO of its state oil company, Saudi Aramco which is seen as an important step to spearhead the restructuring of its economy.

Industrial metal basket ETPs received inflows worth US$3.9mn, in stark contrast to outflows from copper, nickel and aluminium ETPs of US$4.6mn, US$14.1mn and US$5.3mn respectively. Outflows from nickel ETPs widened the most by US$14.1mn over the last three weeks on the back of profit taking. Nickel prices rose 7.5% on Thursday marking their highest daily increase in 6½ years and putting prices at their highest level since December 2014 owing to concerns of further sanctions being imposed by the US on Russia.

European equity ETPs faced outflows worth US$5.7mn extending the prior week’s trend of outflows as investors took profits ahead of the European Central Bank meeting this Thursday. Given the raft of mixed macro-economic data in Europe, investors will be looking out for further guidance on its asset purchase program.

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Global political upheaval offers a silver lining to ETP flows

Global political upheaval offers a silver lining to ETP flow

ETF Securities – Global political upheaval offers a silver lining to ETP flows

Highlights

  • Silver ETPs attracted the lion’s share of inflows.
  • Inflows into global equity ETPs led by robotics rose to their highest level in 8 weeks.
  • Safe haven currency seekers drove inflows into long yen ETPs to their highest level on record.

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Silver ETPs attracted the lion’s share of inflows, worth US$54.5mn, marking its highest level of inflows since September 2017. The main catalyst has been the political tensions emanating between the UK and Russia over the poison attack on a former Russian spy in England. Britain has imposed sanctions on Russia and in retaliation Russia intends to expel British diplomats. The US, France and Germany have also shown their support for the UK and hold Russia responsible for the poison attack.

Added to that, the frequent shake-up of the Trump Administration, which last week saw the dismissal of secretary of state Rex Tillerson owing to differences over foreign policy issues, have raised concerns over protectionist US policies. Silver is attractively priced, with the gold to silver price ratio remaining elevated relative to recent history. 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.

Gold ETP flows reversed the prior week’s anomaly of inflows in 2018 by posting outflows of US$28.7mn. Gold prices tend to show weakness in the run-up to Fed meetings. This was evident last week as investors shifted their attention to this week’s Federal Reserve policy meeting, gold prices headed for their biggest weekly drop in a month. The key takeaway will be the likelihood of four rate hikes in the Fed’s projected dot plot for 2018.

Inflows into global equity ETPs, led by robotics worth US$24mn rose to their highest level in eight weeks. Looming political risks and rising protectionist policies caused global equity markets to end the week on a weaker footing. As a consequence investors sought to increase exposure to niche sectors within technology such as robotics and cybersecurity.

Redemptions from US equities totalling US$9.8mn led by Master Limited Partnership (MLPs) rose to their highest level since June 2015. Subsequent to the ruling from the Federal Energy Regulatory Commission (FERC) last week disallowing income tax recovery on interstate pipeline contracts, the MLP industry faced a broad sell off. We believe this is an overreaction. We expect pipelines owned by MLPs that cross state lines and rely on FERC-regulated tariffs to be the most impacted by this ruling.

Long Yen ETPs attracted the highest inflows on record amounting to US$25.2mn as investors took shelter among safe haven currencies amidst the global political upheaval.

Tighter monetary policy signalled by Norway’s central bank led to US$9.3mn of outflows from NOK ETPs. Last week Norway’s central bank signalled it will raise interest rates faster than expected supported by higher growth and a change in the inflation target. This led buoyancy to the Norwegian Krona, that surged 0.9%, reaching its highest level since November 2017.

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

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Gold, Oil, and Inflation in 2018

Gold, Oil, and Inflation in 2018

Investment Insights December 2017  Gold, Oil, and Inflation in 2018

Summary

  • Gold may remain flat for 2018 but remains an attractive tool to hedge against potential market volatility and geopolitical risks.
  • Oil prices may weaken due to rising US production despite falling global inventories and elevated political risk premia.
  • Inflation may persistently rise throughout 2018.

Macro Outlook

The world is currently experiencing synchronous growth supported by massive central bank stimulus. There are, however, indications that developed markets are likely close to their cycle highs, and a period of slower growth potentially lies ahead. While we think that the world economy will escape a significant upset in 2018, there remain formidable tail risks.

Navigating the stretched valuations in both equity and bond markets and the potential pitfalls of low volatility will be a critical objective for investors in 2018. The unwinding of monetary policy brings risks to both bonds and equities, likely renewing appetite for alternative assets classes such as commodities, real assets, and precious metals.

Earnings may face headwinds from tighter US monetary policy and wage growth. As the US jobs market continues to tighten in 2018, wage pressures may rise significantly and reinforce inflation momentum due to the need for businesses to increase prices.

The US central bank may continue to raise rates in 2018. That comes on top of the balance-sheet run-off that the Federal Reserve (Fed) has already announced. Although some market participants think that under a new Chair, the Fed will may become more dovish, we believe the central bank will remain data-dependent and trained staff economists’ analysis will become more influential in the Board’s decision-making. In light of strengthening domestic demand and a tight labor market, the inflationary potential will be hard to ignore.

Another potential consequence of tighter US policy is the negative impact on emerging market economic growth, and in particular China. Higher borrowing, input costs and currency volatility may weigh on emerging market growth.

Gold Outlook

Our base case fair-value for gold is broadly flat over the coming year, as support from rising inflation will counter the downward pressure from rising interest rates. Despite policy interest rates rising in 2017, the US dollar has depreciated and treasury yields have declined. We expect these paradoxical trends to abate in 2018, and thus weigh on gold prices. However, we believe three rate hikes in 2018 will be required to keep inflation expectations anchored.

Exhibit 1: 2018 gold price outlook scenarios

Most of the variation of the gold price in our bull and bear cases (compared to our base case) comes from assumptions around speculative positioning. Many measures of market volatility are currently subdued. However, several risks – both political and financial – exist. Sentiment towards gold could shift quite widely depending on which of these views dominate market psyche.

Risks which may push demand for gold futures higher benefiting prices include continued sabre-rattling from North Korea; tensions between Saudi Arabia and Iran escalate; a disorderly unwind of credit in China; political populism and elections in Europe; and a spike in market volatility as yield-trades unwind.

Currently investor positioning is elevated due to investor fears around continued sabre-rattling between US/Japan and North Korea and some of the tensions in the Middle East. These concerns could fall away if new developments on these geopolitical issues do not resurface. We have observed that when such geopolitical issues simmer in the background, political risk-premia tends to dissipate from the price of gold. It requires keeping the issues at the forefront of market psyche for the premia to endure.

Oil Outlook

Many market commentators argued a year ago that OPEC’s strategy was to flip the oil futures curve from contango to backwardation. Contango, they argued, provided the incentive for US shale producers to keep pumping out oil despite depressed spot prices because prices for future delivery were higher and so they could store oil today and lock into higher prices at a future date. Contango therefore would see continuous increases in inventory. The futures curve is now in backwardation.

Inventories have been declining across the OECD (Organization for Economic Co-operation and Development). Most of the declines have come from floating storage (which is the most expensive form of storage).We are unlikely to see the decline in inventories continue however. At current prices, US production will likely expand substantially. US shale oil production can break-even at close to US$40/barrel (bbl). With WTI (West Texas Intermediate) oil currently trading at US$55/bbl, there is plenty of headroom for profitability and we expect a strong expansion in supply.

In 2018, US production may hit an all-time high, surpassing the cycle peak reached before the price war in 2014 and above the 10 million barrel mark last hit in 1970. There is little indication that the backwardation in futures curves is going to stop US production from expanding.

Exhibit 2: Oil supply and demand outlook

In October 2017, OPEC (Organization of the Petroleum Exporting Countries) and its 10 non-OPEC partners posted their best level of compliance with the production curb deal to date. However, looking at the detail, it is countries like Iraq who managed to step-up the most to improve compliance. Iraq’s compliance levels jumped from 22% in September to 85% in October, making a strong contribution to the rise in OPEC’s overall compliance (95% in September to 106% in October).

That is unlikely to be repeated given that the supply disruptions stemming from the Kurdish region’s vote for independence was the driver. We doubt the threat to cut off oil production from the Kurdish region is credible. Turkey, the main buyer of the oil has not followed through with threats to shut-down pipelines that take oil out of the region.

OPEC and its non-OPEC partners announced on November 30th, that they will extend the deal to cut supply from October 2016 by 1.8 million barrels to the end of 2018. We think that compliance in this extended deal will fall short of expectations. Russia’s insistence on discussing an exit strategy and having a review in June 2018 indicates that the patience of non-OPEC partners in the deal is wearing thin.With the US expanding supply and OPEC likely to under deliver on its promise to consistently curb production, we expect the supply to grow. At the same time, demand is unlikely to continue to grow at the current pace, with prices having gained 33% over the past year. Q4 2017 may be the last quarter of deficit for a while. Surpluses are going to contribute to higher OECD inventories.

The Crown Prince of Saudi Arabia, Mohammed bin Salman, in his drive to modernize the Saudi economy, has taken aim at corruption in the country. With many of the economic and political elite having been caught up in the investigation, there is a risk that the fragile consensus that held the Saudi state together for many decades could unravel. Saudi Arabia has accused Iran and Lebanon of committing acts of war. Saudi Arabia initiated a military intervention in Yemen in 2015 that has been seen as a ‘proxy war’ with Iran given Iran’s support for rebel Houthis that had toppled Yemen’s former government. Recent developments show that this proxy war is escalating.

The market perceives both the internal and external conflicts in Saudi Arabia as a source of disruption in oil production in the region. We believe that the geopolitical premium priced into oil is likely to be transient unless a war actually breaks out. The Saudi proxy war with Iran has been raging for over two years, with little reflection in the price of oil until recently. Unless investors are constantly reminded of the risks, the premia tends to evaporate within a matter of weeks.

Inflation Outlook

Inflation has been subdued in 2017, despite many signs of cyclical strength, but a large number of idiosyncratic factors account for this apparent weakness in price movements. Dominant wireless phone service providers changing pricing; solar eclipse changing the timing of hotel stays; severe hurricane disruptions; budget airlines opening new routes are some of the idiosyncratic factors that are unlikely to be repeated.

Additionally, the calculation of owner occupied equivalent rent has caused some distortions in the inflation numbers, as it is sensitive to energy prices. With volatility in energy prices having fallen, we expect these distortions to subside. The unemployment rate is at its lowest in 16 years and a healthy number of jobs are being added every month (notwithstanding hurricane disruptions). The strength in the labor market may show up in inflation as per its traditional relationship.We expect US inflation to rise to 2.4% in June 2018 and 2.6% by December 2018 (from 2.2% in September 2017). These levels will likely be uncomfortably high for the Fed, but given the lags in policy and price response, there is little the Fed can do next year to stop it (the inflationary pressure has been built up this year).

Important Risks

The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results. Risk premia is the difference between the expected return on a security or portfolio and the ”riskless rate of interest” (the certain return on a riskless security.

Diversification does not eliminate the risk of experiencing investment losses. All investing involves risk, including the loss of principal.

The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental economic organisation with 35 member countries, founded in 1960 to stimulate economic progress and world trade. Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of 14 nations as of May 2017, founded in 1960 in Baghdad by the first five members, and headquartered since 1965 in Vienna.

The Federal Reserve System, often referred to as the Federal Reserve or simply ”the Fed,” is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. Backwardation is a theory developed in respect to the price of a futures contract and the contract’s time to expire; as the contract approaches expiration, the futures contract trades at a higher price compared to when the contract was further away from expiration. Contango is a situation where the futures price of a commodity is above the expected future spot price.

Maxwell Gold is a registered representative of ALPS Distributors, Inc.

ALPS Distributors, Inc.

Safe haven assets rally on the news of US air strikes against Syria

Safe haven assets rally on the news of US air strikes against Syria

ETF Securities Weekly Flows Analysis – Safe haven assets rally on the news of US air strikes against Syria

  • Gold ETPs recorded US$42m of inflows last week as tensions escalate between the US and Russia.
  • Investors took profits on oil as prices rose over 3% on production outages and US military strikes in Syria.
  • Investors increased their long position into EUR ETPs as Eurozone recovery gains momentum.

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Investors poured US$42m into long gold ETPs as sentiment turned bearish following the launch of US missiles strikes on Syria in response to the chemical attack. In turn, Russian President Putin condemned the US air strikes on Syria and suspended its agreement with the US to avoid hostile standoffs in the Syrian airspace. The escalation of tensions between the US and Russia led gold price to rise 1.7% to US$1,270 an ounce on the news, the highest level since last November, posting a 10% increase year-to-date. What’s more, the 10yr US Treasuries yield is down 3bps to 2.31% also reflecting defensive strategies and a weaker-than-expected US employment report (nonfarm payrolls came at 98k versus a consensus of 180k).

After five consecutive weeks of inflows, crude oil ETPs saw US$19m of outflows as investors secure profits. The unexpected rise of US inventory by 1.6m barrels was not enough to offset the positive price-effect from the current production outages in the North Sea and Canada. Besides, oil prices jumped as much as 2% in intra-day trade in reaction to the news of US military strikes on Syria. We believe that was an overreaction as Syria is not a significant producer of oil. Market concerns may be more centered around how Syria’s allies such as Russia and Iran will react. But with Iran able to increase production while other OPEC members are cutting. Russia is still far from cutting production back enough to meet its obligations under the OPEC/non- OPEC deal. We see a short-term correction to oil prices after the knee-jerk reaction to this missile strike.

Industrial metals ETPs saw US$11m of inflows reflecting stronger global macroeconomic data. Industrial metals prices found support from improving economic data and rising stock markets. However, metals prices edged down slightly after the news of US air strikes on Syria, reflecting the rotation from cyclicals to defensive assets.

Last week there was US$18.8m of outflows from short EUR ETPs, while long EUR ETPs saw US$3.2m in inflows. Investors’ sentiment toward the euro may be edging upward after ECB President Draghi stated that “the recovery is progressing and now may be gaining momentum” at a conference at Frankfurt’s Goethe University last Thursday.

This week. The G7 foreign ministers will hold a press conference on Tuesday after the publication of UK inflation (Mar) and Germany ZEW survey (Apr). A strong Chinese trade report for March (Thu) will further support cyclicals. US and UK markets closed for Good Friday.

For more information contact

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

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Oil: US supply response to weigh on prices

Oil: US supply response to weigh on prices

While the market has greeted OPEC’s 90% compliance rate with its new quota with a lot of enthusiasm, we believe that rising US production will continue to weigh on oil prices and limit WTI oil to US$55/bbl in the first half of the year, US supply response to weigh on prices.

As oil prices have stabilised in the US$50-55/bbl region since December 2016, oil production in the US has surged. Rig counts in the US have risen 85% since the low was reached in May 2016. Gains in rig efficiency mean that the US can produce a lot more oil with less rigs in operation than in back in 2014.

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Production in the US is now only 7% below the peak reached in June 2015, after production surged since October 2016.

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US crude oil inventory is only 1% below its all-time high. The last time inventory was this high (September 2016), WTI was trading at US$45/bbl.

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With so much faith placed on the OPEC/non-OPEC deal to cut output, we fear that the market is set up for disappointment. Speculative positioning on NYMEX WTI futures contracts is more than 2.5 standards deviations above its historical average. Compliance with quotas often starts strong and deteriorates as time goes on. While Russia has cut oil production and therefore has complied with its deal with OPEC, it aims to increase exports, offloading existing stocks. With seasonal low demand in Saudi Arabia, we believe that exports from the country could also remain strong despite productions cuts that more than meet the quota requirement. In 2016 Saudi Arabia exported record levels of oil (7.65 million barrels per day).

(Click to enlarge)

Nitesh Shah, Research Analyst at ETF Securities

Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).