Investors shun gold for oil as bargain-hunting resumes

The World Bank in its latest commodity markets outlook has forecast all commodity prices to keep falling this year with the notable exception of oil, which is expected to climb given an uptick in demand

Declining oil prices attract bargain hunters. This week ETFS WTI Crude Oil Classic (CRUD) and ETFS Leveraged WTI Crude Oil (LOIL) witnessed their third consecutive week of inflows of $20mn and $13mn respectively. Seasonal factors typically reduce reserves around this time of year, but stocks surged by 2.5m barrels defying predictions of 2.3m barrels decline. Investors continue to raise bets of a reversal in price of WTI crude oil as it settled below $50 a barrel for the first time since early April this year. We believe that the recent weakness in prices will encourage oil producers to tighten supply. Wood Mackenzie’s recent study indicates a US$200bn cut in investment across the industry, primarily in high-cost non OPEC, non-US production, that will lead to lower supplies in the future.

Precious metals recorded largest outflows in 19 weeks, totaling $309mn last week. As the price of gold slid to its lowest level since March 2010, ETFS physically-backed gold holdings saw net outflows of US$284mn, the largest in 19 weeks. Market sentiment towards the yellow metal continued to wane as existing home sales reached an 81⁄2 year high and jobless claims reached an 81⁄2 year low in the US increasing the probability of a rate hike and continued US dollar strength. There has been a significant decline in the ‘net’ long exposure in gold, with positioning reaching its lowest level since June 2013. This week Swiss customs data reported total gold outflows in June at 98.5 tonnes, its lowest level since August last year. Swiss gold shipments to China were down sharply by 25 per cent m-o-m while shipments to India were down a modest 12.5 per cent m-o-m. As India approaches wedding season we view current levels as supportive for accumulating positions.

As platinum dipped below the $1000 an ounce for the first time in more than 6 years, investors continued to sell out of long platinum ETPs. Outflows amounted to US$22.4mn, the highest since March 2015. Downward price pressure in PGMs led investors to offload US$7.3mn from ETFS Physical backed Palladium (PHPD).
Investors are clearly spooked by the violent price declines, despite the prospects for a supply deficit amid strengthening demand for pollution abatement technologies.

Key events to watch this week. Investors will be on the lookout for direction on US interest rates as the Federal Reserve Open Market Committee convenes this week.
While no change is expected at this meeting investors will be poised for cues on rate increases at its September meeting, when consensus expects the first rate increase since 2006. US durable goods orders, consumer confidence and GDP data will provide further guidance on dollar strength this week.

Aneeka Gupta, CFA – Research Analyst – ETF Securities