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Investor Hedging Favours Gold
ETF Securities Commodity ETP Weekly Investor Hedging Favours Gold
Gold ETPs see three consecutive weeks of inflows.
Third consecutive week of inflows for industrial metals, led by ETFS Copper (COPA).
ETFS Wheat (WEAT) sees fifth consecutive week of inflows.
Profit-taking in oil ETPs for the eighth consecutive week.
Although Greece managed to scrape together its €750mn payment to the IMF, the fact it had to do so by tapping into its own IMF reserves account was a cause for concern. With its cash wearing so thin, the risk of an accident now is very high. Weaker-than-expected German Q1 GDP data, a downgrade of UK GDP forecast from the Bank of England and a string of poor Chinese data point to monetary easing from the world’s major central banks continuing for the foreseeable future. Gold responded decisively, jumping 3.2% on the week, while silver riding its coat-tail gained 6.4%.
Gold ETPs see three consecutive weeks of inflows. The recent rally in gold prices and rising market anxiety about Greece and European growth rates has driven heightened interest in gold. Last week we saw US$11.1mn of inflows into gold ETPs, adding to the US$62.3mn of cumulative inflows from the previous two weeks. World Gold Council data released last week showed only modest decline in gold demand in Q1 2015 relative to same period last year, with investment demand posting gains led by the ETP inflows.
Third consecutive week of inflows for industrial metals, led by ETFS Copper (COPA). COPA received US$4.8mn after the copper price has risen 7.6% in the past month as supply forecasts were revised down. The International Copper Study Group has for the past few years forecast supply surplus, when in reality the market has ended the year in a supply deficit. ICSG tend not to factor in the disruption to output from miner strikes, accidents and port closures. They have forecast a surplus in 2015 once again, but the recent flooding in Chile has already been a setback to global output.
ETFS Wheat (WEAT) sees fifth consecutive week of inflows. After wheat prices hit a five-year low two weeks ago, they bounced 7.7% last week. Investors have been steady building positions in wheat ETPs, bargain hunting as underlying prices remain depressed. Last week WEAT received US$3.7mn. With US farmers expecting to plant less of the grain this year, we expect supply to tighten. The near-perfect weather conditions we saw last year are unlikely to be repeated this year. In fact the Australian Bureau of Meteorology last week declared that we are currently in an El Niño weather event, which could be quite substantial in strength. El Niño weather events typically make countries like Australia and India more warm and dry than usual, potentially hurting their wheat crops.
Profit-taking in oil ETPs for the eighth consecutive week. Both Brent and WTI benchmarks rose 1.6% last week. Unsurprisingly, some ETP investors chose to take profit, seeing US$8.6mn of outflows. With OPEC announcing last week that it increased daily production by 18,000 barrel per day in April and the International Energy Agency claiming that OPEC’s battle for market share is ‘only just beginning’ the prospects for a correction in the 40% price rally since March seem high. Meanwhile, investors also took profit on a US natural gas ETPs after a 10% price rally last week. Natural gas surged following expectations of warmer US weather that would boost demand for the commodity to generate power for air-conditioning.
Key events to watch this week. US, Euro area and UK inflation numbers will be closely viewed to see if deflationary trends are abating. Continued price weakness should keep a central bank easing bias, which has been historically positive for gold.
Video Presentation
Nitesh Shah, 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.
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority.
From 18 to 19 November 2024, Brazil will host the G20 summit in Rio for the first time as the focus of the world’s most important platform for global economic cooperation.
The coalition, which includes the USA, China, India, the E U and, most recently, the African Union, represents the world’s most important economies, which, according to OECD figures, account for around 80 per cent of global gross domestic product, 75 per cent of world trade and two thirds of the world’s population.
Since Brazilian President Luiz Inácio Lula da Silva (Lula) took up his third uninterrupted term of office at the beginning of 2023, he has spent a lot of time abroad to improve his country’s image in the world. His efforts could pay off. A recent Pew Research survey found that most Brazilian adults are optimistic about their country’s status as an international power.
In addition to the G20, Brazil is also set to host other high-profile events such as the UN Climate Change Conference (COP30) and the BRICS summit (Brazil, Russia, India, China and South Africa) in 2025, while also seeking membership of the Organisation for Economic Co-operation and Development (OECD).
In the almost three years since Brazil initiated its formal accession process for OECD membership, the country has achieved many milestones on the road to this goal. If successful, Brazil would be in a unique position to influence the increasing geopolitical and economic competition between industrialised and developing countries, as it is the only country to be represented in the BRICS, the G20 and the OECD simultaneously.
As the eighth largest economy in the world and the largest economy in Latin America, Brazil could be a strong link in the global discourse on key issues for the Global South (according to UN Trade and Development, the Global South essentially comprises Africa, Latin America and the Caribbean, Asia excluding Israel, Japan and South Korea, and Oceania excluding Australia and New Zealand).
These issues include, above all, the fight against hunger, poverty and inequality, sustainable development and the reform of global governance. If Brazil is able to achieve political and financial commitments to progress on priorities such as digital infrastructure, this could lead not only to an increase in Brazil’s GDP, but also to a narrowing of the economic and urban-rural divide and a reduction in gender inequality. Consider that the introduction of a relatively new instant money transfer platform operated by the central bank, known as Pix, has already promoted financial inclusion and increased access to banking services from around 70 per cent of the population to more than 84 per cent (source: Carnegie Endowment for International Peace).
We expect that an OECD seal of approval for Brazil will also encourage global investors seeking the assurance of the Coalition’s high standards for the ease of doing business. A seat at the table would give Brazil a stronger voice in shaping best practices and global frameworks for rapidly evolving technology standards. Brazilian companies specialising in artificial intelligence and financial technology are already among the largest in South America.
As the largest oil producer in Latin America, resource-rich Brazil is a leader in the energy sector, as it is one of the ten largest oil producers in the world (according to the U.S. Energy Information Administration, Brazil produced 4 per cent of the world’s total oil production at the end of 2023). However, the country’s largest sector is finance, with a weighting of more than 36 per cent according to the MSCI Brazil Index.
Central bank in interest rate hike mode
High government spending continues to be a major problem. In our opinion, any reduction in this spending would give the country’s capital markets cause for optimism. Meanwhile, Brazil is an exception to the global trend of falling interest rates: In September, Brazil’s central bank raised interest rates to curb inflationary pressures. The market expects the Brazilian real to remain stable or appreciate slightly in the near future, partly due to falling US interest rates. We see this as a potential advantage for foreign investors in Brazil.
It is also encouraging to see that progress is being made on Brazil’s long-awaited VAT reform, which could further boost the private sector as efficiency gains from a simpler tax system would favour investment.
Growth in Brazil’s manufacturing and services sectors accelerated in September as output in both sectors increased, indicating strong growth in economic activity. In addition, the Brazilian market is currently trading at valuations that we consider favourable. Improved conditions in Brazil’s manufacturing sector have been driven by a resurgence in production, stronger job creation and a pick-up in sales growth, according to S&P Global. At the end of September, Brazil’s Manufacturing Purchasing Managers’ Index was surpassed only by India, rising to 53.2 (from 50.4 in August; readings above 50 indicate expansion).
Chart 1: Brazilian Purchasing Managers’ Index
Source: FactSet, Markit Economics
Expectations are also high that Brazil will experience an economic boost in 2027, having won the historic bid to host the FIFA Women’s World Cup – a first not only for Brazil, but for the whole of South America.
Over the near term, we believe investors should stay attuned to the opportunities in Brazil and may find what we consider an attractive entry point into this large and diverse market.
Chart 2: The valuations of Latin American equities look favourable
Attractive valuations compared to industrialised countries, emerging markets and own history
Chart 3: Latin American equities offer high dividends
High dividend yield compared to industrialised countries, emerging markets and own history
From Dina Ting, Head of Global Index Portfolio Management at Franklin Templeton
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