Commodity ETP Weekly: Palladium Bucks Commodity Outflow Trend as South Africa Supply Concerns Rise

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Precious metals, particularly gold and silver, continue to be shunned as investors reassess to the outlook for global growth  and  Fed monetary policy. While the persistent strength of the US dollar  in recent weeks has weighed on commodity prices, the sharp moves lower in price appear to be overly aggressive, given the positive underlying drivers of many commodity markets. The US Federal Reserve indicated at its last meeting that the pace of bond purchases could be moderated toward the end of 2013. Since then, following a surge in interest rates,  Fed officials have reiterated that economic  recovery  needs to  be  robust for the gradual removal of the current stimulus to occur. An economic scenario of rising growth in the US, complemented by ongoing  strength  in emerging Asian economies, is a positive for cyclical assets. We expect that to translate into higher prices for commodities, particularly those metals which are trading at or below their marginal cost of production…

ETF Securities Research

Palladium ETPs  receives US$12mn  of inflows,  the largest in nine weeks.  Palladium’s  price  fundamentals remain the strongest across the precious metals sector  in our view. South African production, which accounts for 37% of global palladium production, continues to become more costly. Last week, the National Union of Mineworkers demanded pay increases of up to 60% for workers at Impala Platinum, the world’s second largest platinum producer.  Meanwhile,  the relative demand  profile is robust, relying on the US and Chinese auto markets for demand compared
to that of its counterpart, platinum.

Long copper ETPs see largest outflows in nine weeks, totalling US$25mn.  Long copper  ETPs saw  the first outflows in a month, as investors digested the news that Indonesia’s Grasberg copper mine, the world’s  second largest,  has recommenced production after a safety inspection.  First shipments from  Rio Tinto’s  new Oyu  Tolgoi mine in Mongolia  are yet  to be completed, pending the government’s go ahead after incumbent President Tsakhia won the election  last week. The copper surplus remains uncertain this year and any uptick in Chinese demand will be a boost for prices. Futures positioning is at an extreme negative now.

Gold ETP outflows  continue for 13th  consecutive week as  US interest rates  remain elevated.  Physical gold ETPs saw  another US$352mn of outflows last week,  the largest in six weeks. The gold price reached the lowest level in nearly 3 years  last week.  In response, commercial traders have become the least bearish about gold since September 2002, when the gold price was trading around US$310/oz. Commercial futures and options  short  positions, by contrast,  are now at their lowest level since September 2002.

ETPs  experience fourth consecutive weekly outflows, ahead of expected bearish crop report. US$17mn was withdrawn from long agriculture  ETPs,  reflecting  the negative price outlook as  improving growing  conditions  lift expectations of better supply.  The brunt of  the outflows  were  from ETFS  Agriculture (AIGA) and ETFS  Corn  (CORN), accounted for the majority of outflows from the sector, seeing US$5.3mn and US$4.4mn withdrawn, respectively.  

Investors increasingly bullish on US natural gas prices. After a 7.6% price decline last week, on the back of rising inventory levels, investors are reducing short positions and increasing leveraged long positions, expecting a move higher.  Tactical investors reversed last week’s inflows, into ETFS Short Natural Gas (SNGA), withdrawing US$4.9mn, the largest outflows in over six months. Concurrently, inflows into ETFS Leveraged Natural Gas (LNGA) totalled US$3.9mn.

Key events to watch this week. Nonfarm payrolls will take centre stage this week, with investors clearly focussing on the US economy’s ability to generate jobs in the early stages of recovery. Manufacturing  indicators in the US and Europe will also be a key focus of the markets.


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