Commodity prices bottoming out

Major commodity prices are showing signs of recovery. Both oil benchmarks along with most metals have been posting positive returns for at least the third consecutive week.

Silver inflows begin to track gold inflows. Last week investors continued to pile into gold ETPs for the 9th consecutive week, recording inflows of US$79.2mn. The price of gold rose 1.2% over the past week, crossing US$1,280/oz. on Friday as US market opened. Buoyant US non-farm payroll for February combined with an upward revision of December and January payroll data failed to weigh on gold prices as one would expect. Strong labour market data signals the US economy is recovering and is likely to increase the odds for another rate hike by the US Federal Reserve (Fed) on March 16. While expectations of rate hikes usually weigh on gold price, heightened uncertainty in cyclical markets has seen demand for gold and its price rise as investors look for safety in a haven asset. While silver has failed to follow gold prices higher, inflows last week were more comparable, with US$72.8mn of inflows into silver.

Surge in oil prices triggered first ETPs outflows since December 2015. Last week saw Brent and WTI surging 5% and 4.5% respectively. Both benchmarks were trading around their two-month highs for most of the week. Surging oil prices seems to indicate that the reduction of oil production in the US combined with keys OPEC members’ decision to freeze production at January levels could be sufficient to reduce the oversupply on the global oil market. Despite larger-than-expected stockpile, US oil production declined for the 6th consecutive week the level last seen in November 2014, lending support to oil prices.

Price recovery across the metal complex should eventually translate into flows. All metals including gold have reached multi-year lows (although at different times) within the past 6 months and they have all recovered since, posting an average return of 17% from their respective lows. Nickel saw the most impressive rally, up 19% over the past 3 weeks. With the exception of palladium, futures net long positions over the past month rose by 62% on average. Gold saw the largest increase in net long positions, up 160%, the result of rising long positions and falling short positions. It looks like the excessive pessimism toward metals is fading away with industrial metals basket ETPs recording positive flows for the third consecutive week.

Key events to watch this week. All eyes will be on Mario Draghi and the ECB meeting this Thursday as the central bank previously indicated that further action will be taken to support the Eurozone economy if necessary. Poor economic data in the euro area combined with recent European bank rout has increased investor expectations that the ECB will decide to ease policy further. A disappointing Q4 GDP data reading for the Eurozone due two days before the meeting will only add pressure on the ECB to deliver. Trade balance data for key countries will provide an update on global demand for commodities.

Edith Southammakosane – Multi-Asset Strategist – ETF Securities