Gold inflows resume as geopolitics take centre stage

Gold inflows hit 3-week high as ETP investors seek a haven asset

Gold inflows rise to a three week high as investors seek a haven asset amid continued sabre-rattling. Although gold prices erased most of its past months gains, inflows into gold ETPs rose to US$39.3mn. The US Federal Reserve announced the start of its quantitative tightening programme – allowing US$6bn of Treasuries and US$4bn of mortgage-backed-securities to run off its balance sheet in October. The Fed also indicated that it will see-through the relatively tame current inflation readings and potential temporary hurricane related economic weakness and focus on how the tightness in the labour market will increase inflationary pressures. The odds for a December rate hike have risen substantially (from 35% a month ago to 70% currently according to Fed Fund futures). Gold fell 1.7% as US Treasury 10-yr yield rose to 2.27% from 2.03%. However, ETP investors used the price weakness last week to increase their holding of ETPs as geopolitical risks do not seem to be fading. Following President Trump’s threat to “totally destroy” North Korea, Kim Jong Un said he would pay dearly for his speech and reciprocated with a threat to test a hydrogen bomb in the Pacific ocean. Gold rose once 0.5% on Friday as markets switched their attention back to geopolitics.

Oil ETP outflows continue as investors take profit from the rally. Oil prices have rallied close to 5% over the past fortnight as markets have become more optimistic about demand recovering and OPEC countries sticking to their pact to curb supplies.
Investors sold US$21.7mn of oil ETPs as they took profit. Iraq has publically supported an extension of the current quota, lifting markets expectations about the outcomes from Friday’s OPEC Joint Ministerial Monitoring Committee (JMMC). However, Iraq has not complied with the current quota, leaving it a poor spokesperson for dealextension.
Friday’s meeting was unlikely to yield any real policy moves as it was not designed for making new decisions. The next major policy-deciding OPEC meeting will take place in November. Without an extension to the deal, global oil markets are likely to return to a surplus.

Industrial metal ETPs saw third consecutive week of outflows. As prices of industrial metals continued to decline, investors pared back their positions. However, outflows last week of US$9.8mn were relatively small compared to US117mn and US$119mn in the prior weeks. We believe that metal prices are making a short-term pull-back as momentum trades are shaken out of the market after a strong rally that commenced in June. Investors are likely to gain a better entry point after this pullback.
With widening supply deficits and continued strength in demand the fundamentals for industrial metals remain firm

Nitesh Shah – Director – Commodity Strategy – ETF Securities