Commodity ETP Weekly – Gold retains its popularity despite record sentiment highs
- Flows into gold ETPs did not abate last week, with inflows totalling US$121mn, alongside silver ETP inflows of US$17mn.
- Crude oil ETPs recorded a 7th consecutive week of inflows of US$193mn last week.
- Industrial metal inflows continued, with the majority of the US$14mn accruing to copper ETPs.
Flows in to gold did not abate last week, with inflows totalling$121mn, alongside inflows of US$17mn into silver ETPs. CFTC futures data highlights sentiment for gold being close to an all-time-high (mean-adjusted) since data was first collected in 1995. Nonetheless, we continue to see very little flow into short gold ETPs, with inflows of $0.8m. Historically strong inflows into long positions have been accompanied with steady rises in short positions. Whilst sentiment remains exceptionally high for gold we believe it is justified for several reasons. Firstly, negative yields across Europe mean gold carry costs are now less than holding a Swiss or German government bond. Secondly, populist politics in Europe and the US remain prevalent, with many populist parties leading in polls. Finally, the US monetary policy trajectory remains unclear due recent US Dollar strength and mixed economic data. Our fair value for gold remains at US$1440/oz.
Crude oil ETPs recorded a 7th consecutive week of inflows of US$193mn, although unsurprisingly following price returns of 12% over the last few weeks, inflows have slowed this week to US$5mn compared to US$113mn the previous week. We believe the oil price will remain range bound from US$40 to US$55 per barrel.
Industrial metal inflows continued with flows over the week of US$13.9mn. The majority of inflows accrued to copper ETPs, totalling US$10.4mn. We believe this is due to state owned enterprises in China having accelerated their fixed asset investment in the first half according to data recently released by the CEIC, rising 23.5% compared to 9.9% in H2 2015. In general, industrial metal prices remain below marginal cost and are in supply deficit which is likely to be exacerbated by continued aggressive capital expenditure cuts by miners.
In currencies, we saw investors preferring the EUR against GBP, after a raft of weak economic releases from the UK, inflows into the currency pair EUR/GBP rose by US$6.3mn. Inflows into USD suggests investors have mixed views on the direction of the trajectory of the US Federal Reserve (FED) policy, with inflows into long and short USD pairs both totalling US$2.1mn, since the July FED meeting.
In equities there has been continued appetite gold miners with inflows of US$6.8mn for the week. Given the recent stellar performance we are cautious on how much the recent gold rally will expand margins versus the longer-term impact on earnings from aggressive capital expenditure cuts. By our measures we see the recent rise in gold miner prices reflecting US$1550/oz. for the gold price, well above our fair value estimates.
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