Commodity ETP Weekly – Gold inflows suggest sentiment is fragile as oil outflows accelerate on profit-taking

•    Gold leads ytd precious metals inflows above US$1.5bn, as investor sentiment remains fragile.
•    Oil outflows accelerated last week, as investors booked profits.
•    Commodity price moves will depend on the US Federal Reserve meeting last week. Whether the central bank hikes rates or not will be crucial for investor sentiment and the direction for the US Dollar.

Gold leads precious metals inflows above US1.5bn in 2016. Physical gold ETPs recorded inflows for the 10th consecutive week totaling US$114.1mn. Cyclical assets, particularly equity markets, struggled to make headway, despite recent improvements in global economic activity. However, aggressive stimulus from both the European Central Bank (ECB) and the Reserve Bank of New Zealand (RBNZ) surprised the market and gave fresh impetus to the gold price, as investors believe that real rates will remain under pressure for some time to come.

Silver, platinum and palladium outshine gold. Industrially-linked precious metals outperformed gold last week, a potential sign that pessimistic sentiment may be bottoming. Investors appear somewhat more cautious and the third consecutive weekly inflows into silver and platinum totalled US$43.1mn and US$12.5mn, respectively. While palladium was the best performer within the precious metals sector, it is the only metal to see net outflows over the course of 2016. Nonetheless, we expect momentum to gather pace as market volatility moderates and industrial demand picks up in line as global auto sales remain solid.

Profit-taking in oil ETPs sees largest outflows since April 2015. The International Energy Agency announced last week that a bottom in the oil price has potentially been reached. Nonetheless, investors appear unwilling to risk hard won gains, divestingUS67mn last week from long oil exchange traded products. Both Brent and WTI crude prices reached the highest level since early December 2015, but volatility remains elevated and could see gains reverse course as risk appetite is fragile. Although the Energy Information Administration reported that US production in December 2015 was the first year-on-year decline in over four years, stockpiles are at record levels (since 1982). Additionally, the weekly increase in stockpiles was the largest on record, indicating that demand still remains deficient to absorb supply.

Key events to watch this week. Central bank meetings will again take centre stage this week after the surprise moves last week from the ECB and RBNZ. The Bank of Japan, the Swiss National Bank and the Bank of England are all holding policy meetings, but the market will be focussed on the US Federal Reserve (Fed). Commodity price direction will be dictated by two things directly related to the Fed’s decision: investor sentiment and the US Dollar. The last economic data release ahead of the Fed’s meeting, US retail sales and inflation, could be key to whether the central bank raises rates or not. Consumers have been an area of strength, boosted by low oil prices and improving jobs market. If this continues next week, the Fed could take (justified) action. We expect that the chance of a rate rise is still a distinct possibility despite the market pricing in less than a 10% chance of a hike. If the Fed hikes, expect gold to continue its move higher as sentiment slumps, despite a stronger USD.

Video Presentation

Martin Arnold, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.

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ETF Securities Research team
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