Investor hedging favours gold

Although Greece managed to scrape together its €750mn payment to the IMF, the fact it had to do so by
tapping into its own IMF reserves account was a cause for concern

Gold ETPs see three consecutive weeks of inflows. The recent rally in gold prices and rising market anxiety about Greece and European growth rates has driven heightened interest in gold. Last week we saw US$11.1mn of inflows into gold ETPs, adding to the US$62.3mn of cumulative inflows from the previous two weeks. World Gold Council data released last week showed only modest decline in gold demand in Q1 2015 relative to same period last year, with investment demand posting gains led by the ETP inflows.

Third consecutive week of inflows for industrial metals, led by ETFS Copper (COPA). COPA received US$4.8mn after the copper price has risen 7.6% in the past month as supply forecasts were revised down. The International Copper Study Group has for the past few years forecast supply surplus, when in reality the market has ended the year in a supply deficit. ICSG tend not to factor in the disruption to output from miner strikes, accidents and port closures. They have forecast a surplus in 2015 once again, but the recent flooding in Chile has already been a setback to global output.

ETFS Wheat (WEAT) sees fifth consecutive week of inflows. After wheat prices hit a five-year low two weeks ago, they bounced 7.7% last week. Investors have been steady building positions in wheat ETPs, bargain hunting as underlying prices remain depressed. Last week WEAT received US$3.7mn. With US farmers expecting to plant less of the grain this year, we expect supply to tighten. The near-perfect weather conditions we saw last year are unlikely to be repeated this year. In fact the Australian Bureau of Meteorology last week declared that we are currently in an El Niño weather event, which could be quite substantial in strength. El Niño weather events typically make countries like Australia and India more warm and dry than usual, potentially hurting their wheat crops.

Profit-taking in oil ETPs for the eighth consecutive week. Both Brent and WTI benchmarks rose 1.6% last week. Unsurprisingly, some ETP investors chose to take profit, seeing US$8.6mn of outflows. With OPEC announcing last week that it increased daily production by 18,000 barrel per day in April and the International Energy Agency claiming that OPEC’s battle for market share is ‘only just beginning’ the prospects for a correction in the 40% price rally since March seem high. Meanwhile, investors also took profit on a US natural gas ETPs after a 10% price rally last week. Natural gas surged following expectations of warmer US weather that would boost demand for the commodity to generate power for air-conditioning.

Key events to watch this week. US, Euro area and UK inflation numbers will be closely viewed to see if deflationary trends are abating. Continued price weakness should keep a central bank easing bias, which has been historically positive for gold.

Nitesh Shah – Associate Director, Research – ETF Securities (UK)