Commodity ETP Weekly : Strong Inflows into Silver ETPs as Bargain Hunters Emerge




Reports of Cyprus readying the sale of its excess gold reserves put the gold price under downward pressure last week, with investors concerned that other countries could follow Cyprus to reduce debt burdens……

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 ETF Securities Research

While downward momentum gathered pace as technical levels were breached late in the week, such a debt reduction approach seems unrealistic given the small value of sovereign gold holdings relative to debt, even for large holders like Italy. Other commodity prices fell on weaker-than-expected Chinese growth and industrial production data. However, from a fundamental perspective, with early signs of deterioration in the US economy appearing and on-going Eurozone weakness likely to keep central banks firmly in aggressive stimulus mode, the slump in precious metals prices seems exaggerated.

Long silver ETCs saw the largest inflows in 7 weeks, totalling US$9.6mn, as depressed prices attracted bargain hunting. Reports of gold price downgrades by some market analysts added to the bearish tone for precious metals after rumours of a possible 400mn euros sale of Cyprus’ gold reserves put precious metals under pressure. Despite the subsequent denial by Cypriot authorities, the possibility of such a precedent made investors wary. The negative mood was reinforced after the March FOMC minutes revealed talks of an early termination of QE3 by some Fed members and technical selling sent gold and silver prices below US$1,400oz and US$24oz, respectively. On the positive side, Chinese imports of gold soared 145% yoy in February as the recent price weakness, coupled with the Chinese New Year, prompted strong buying.

ETFS Physical Palladium (PHPD) suffers US$10.5mn of outflows, the largest since October 2011. News of a strong pick-up in Chinese auto sales in March was obfuscated by lower-than-expected Chinese GDP and industrial production data. Both platinum and palladium lost ground, falling below the US$1,500oz and US$700oz thresholds, respectively. However, positive auto numbers should boost PGM consumption in the medium term and lend support to prices, particularly as PGM prices fall below marginal cost levels for some producers. Given the predominance of fuel engines in China, palladium should be particularly favoured.

Long Brent crude ETCs record US$16mn of inflows, the largest in 6 weeks, as price weakness prompts bargain hunting. At the same time, long WTI crude ETCs registered the biggest outflows in 3 months, totalling US$20.3mn. Brent oil fell sharply last week to the lowest level in nine months, narrowing the WTI-Brent spread to just over US$10 per barrel. On-going geopolitical risk in the Middle-East and Korea failed to counter continued evidence of poor European economic activity and weaker-than-expected Chinese data. The International Energy Agency, US Energy Information Administration and OPEC have reduced their demand forecasts this past month.

Long copper ETCs see over US$31mn of outflows on profit-taking. Copper price rose 2.7% last week prior to Friday’s capitulation, on reports of buoyant Chinese imports in March. However, inventories for most industrial metals remain elevated and any further negative growth news from China or the US is likely to weigh on prices in the short-term.

Key events to watch this week: Policymaker deliberations will dominate market attention this week, with the G20 Finance Ministers and Central Bank Governors’ Meeting ahead of the US Congressional deadline to raise the nation debt limit on Thursday. Although the US federal government’s ability to borrow new money was extended until mid-May, investors will watch closely any progress in the debt ceiling discussions. On the economic data front, US housing statistics and industrial production will be monitored closely for any sign of a slowdown in growth and the possibility of continued stimulus from the Fed.


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