Cyclical Asset Rotation Continues as Political Headwinds Boost USD at Gold’s Expense


An inconclusive Italian election result and the start of an US$1.2tn program of spending cuts in the US weren’t enough to stop investors rotating into more cyclical assets last week.
A stronger US Dollar saw ETP investors continue to shun gold, with February 2013 recording the largest outflows since January 2011. …..

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      Copper and Brent crude oil were key beneficiaries of improving, but still fragile, risk appetite. Strength in the US housing market, where new home sales surged to a 4-1/2-year high, buoyant consumer confidence, rising manufacturing activity, and encouraging words from the Federal Reserve’s Chairman about the likely length of monetary easing kept the appeal of cyclical commodities. However, as the gravity of the political deadlock both in the US and Italy settles in, investors are likely to be attracted by the defensive nature of precious metals such as gold and silver. Meanwhile, Haruhiko Kuroda, the government’s nominee to lead the Bank of Japan, will have tough job of meeting the new inflation target of 2% given the February reading came in at -0.3%. Familiar currency-debasement hedges, like precious metals should remain appealing for investors as five major central banks meet this week, likely signalling intentions for any additional stimulus. Political manoeuvring will dominate headlines and be a key catalyst for commodity price direction as Italian election and US budget negotiations drag on.

      ETFS Brent (OILB) received US$28.4mn, the largest inflows in 12 months, ahead of international diplomatic discussions with Iran over its nuclear program. Current export sanctions against Iran have restricted the global supply of crude oil. Investors positioned themselves for a further crimping of supply. According to a Bloomberg survey, OPEC crude output climbed as a gain by Libya outweighed a cut by Saudi Arabia. Both Brent and WTI crude oil front month prices fell last week, erasing all the gains made this year, as negotiators indicated that Iranian nuclear discussions were constructive.

      ETFS Copper (COPA) saw US$18mn of inflows as US, German and Chinese PMIs indicate economic recovery remains on track . Notwithstanding the difficulty in interpreting the Chinese data during the New Year period, manufacturing PMIs remained above 50 (signalling expansion) in the US, Germany, and China which contrasts to the weakness in UK, French and Italian PMIs. Silver and palladium ETPs also saw some small inflows as the economic recovery boosts their industrial demand potential.

      Physically-backed gold ETPs experience fourth consecutive weekly outflow, totalling US$192mn. Outflows from gold ETPs in February 2013 were the largest since January 2011, as the US Dollar weighed on the gold price. Gold prices were particularly choppy last week, rising to US$1614/oz (+2.0%) after the Italian election results rattled investors, before falling to US$1579/oz (-2.3%) by the end of the week. COMEX net long speculative positions in gold also rebounded from recent lows and interest in the metal may rise further as markets digest the implications of the political deadlock in the US.

      ETFS Coffee (COFF) gained US$4.9mn of inflows, the largest since April 2011. After Arabica coffee prices fell 7% in the first half of February and oversupply fears abated, investors saw an attractive time to increase coffee positions.

      Key events to watch this week: US Non-farm payrolls data will receive much attention this week given the Fed’s pledge to keep quantitative easing going until employment numbers significantly improve. A number of central banks are due to have policy meetings this week including the Bank of Japan, European Central Bank, Bank of England, Reserve Bank of Australia and Bank of Canada.  While none of the central banks are expected to make any policy changes this week, investors will focus on any clues for future rate cuts or asset purchases.


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