Investors sold out of gold and oil ETPs, locking in profits after a 19.5% and 11.4% return year-to-date….
At the same time they are seeking opportunities elsewhere, hoping for a catch-up in performance from some of the laggard commodities such as silver and palladium.
Investors appear optimistic that the commodity rally is becoming more pervasive with strong inflows into broad commodity baskets (US$10.4mn, a four-week high).
Gold sees first weekly outflows this year. Investors sold US$15.9mn of gold ETPs, locking in profits after a 19.5% return since the beginning of the year. At the same time they increased holdings of long silver ETPs by US$12.2mn, marking the fourth week of inflows, as the metal is progressively catching up its yellow counterpart. Silver price gained 3% last week while gold ended the week flat belying the volatility of gold over the course of the week. Last week saw gold falling ahead of the Federal Reserve’s policy meeting on Wednesday. However, the reluctance of the central bank to follow through with the rate tightening cycle it embarked on in December 2015, led investors to believe it is making a policy mistake. As a result, gold rallied 3% after the announcement. Despite upgrading its view of general price strength, the Fed downgraded the number of times it expects to raise rates this year. Labour market strength combined with robust and rising core inflation leads us to believe that the Fed should hike more and sooner than the market expects (the next rate rise is expected in September). A policy error in the making is likely to be gold price positive.
Investors sold oil ETPs amid the 3.7% gain last week. We saw the third consecutive week of outflows from oil ETPs last week. The US$22.6mn withdrawal was entirely from WTI oil ETPs. After a 31% rise in WTI prices in the last month alone, investors were keen to lock in profits. Investors into oil ETPs have always tended to be contrarian, which is reflected our flows. While the market is becoming increasingly optimistic that oil supply can come closer to balance this year as US production declines, Iran’s lack of cooperation with the rest of OPEC to freeze production remains a wild-card and has led some investors to pare back on oil holdings. We believe that Iran overestimates its ability to ramp-up production and exports to pre-sanction levels as the upgrade of existing operable fields and the need for further infrastructure build requires funding that is not supported by the economics. The increase of Iranian oil production in the coming year will likely miss target.
Investors rotate within industrial metals. Investors built US$2mn positions in short copper ETPs last week while buying US$2.7mn of long nickel and US$0.5mn of aluminum. This mainly follows copper’s outperformance among the complex last week, up 4% compared to 1.5% for nickel while aluminum fell 2.8%. Globally, a loose monetary policy setting bodes well for the industrial metals complex.
Key events to watch this week. In this shortened week, a number of PMIs (US, Euro area, Japan) are likely to grab the headlines as they provide a gauge for the strength of industrial demand and thus the demand for cyclical commodities. UK inflation data will provide judgement on whether the Bank of England is following in the footsteps of its US counterpart by ignoring the firm economic fundamentals.