Gold still in favour as investors await Bank of England guidance

Gold remains investor favourite, topping US$1bn since EU Referendum.

US Payrolls took centre stage last week, shocking the market with an upside surprise, with the US economy adding 287k jobs in June. The US economic recovery remains on track and with wage growth continuing to build momentum. The September US Federal Reserve meeting takes on greater significance.

Gold flows top US$1bn since EU Referendum, as investors position portfolios defensively as uncertainty continues. Inflows into gold ETPs reached the highest level in nearly five months. The gold price remains supported by low real bond yields and global economic uncertainty, despite the recent USD strength. While the gold price has jumped over 6% over the past month, silver has surged over 15% in the same timeframe, prompting profit-taking. Investors withdrew US$68mn last week from long silver ETPs, the largest amount since October 2014, after silver price reached the highest level since July 2014.

GBP outflows reach highest level since April 2014, as Brexit clouds economic outlook. Stagflation could become an economic reality for the UK in coming years as business investment falters and consumers pay higher prices for imported goods as the weaker Sterling directly boosts inflation. With the GBP continuing lower, positions in short GBP currency ETPs rose to 27 month highs, totalling US$42mn last week. The vast majority of the fund flows went to establishing long Euro exposures.

Industrial metals see inflows as investors tentatively look at tightening fundamentals. Aluminium led the sector, with investors depositing the largest inflows in 13 months, totalling US$22mn. Aluminium and copper have experienced the largest drawdowns in global stockpiles in recent months, evidence of tighter markets. Announcements of Chinese aluminium production cuts have kept sentiment buoyant, and while May statistics from the International Aluminium Institute shows global production 4% higher from a month earlier, output is 1% lower on the year.

Emerging market debt in favour as investors hunt for yield. Investors are beginning to make initial steps to gain exposure to higher yielding assets, with EM debt products receiving US$43bn last week. Aside from risk hedging we have seen opportunistic behaviour in hunting for value and yield due to widening yield spreads relative to the developed markets and the hindrance of negative yielding bonds in Europe. Inflows for EM debt ETPs have reached the highest level on record.

Key events to watch this week. Investor focus will be skewed toward UK related news flow, with the Bank of England inflation hearing preceding the Monetary Policy Committee meeting on Thursday. Meanwhile, Alcoa kicks off earnings announcements in the US on Monday, giving investors fundamental information to analyse rather than the ebb and flow of UK and European economic sentiment.

Martin Arnold – FX & Macro Strategist – ETF Securities