Articles in Category: Exchange Traded Funds

You could be excused for thinking gold has been eclipsed this year — bought in record amounts by central banks in the first half of this year — as the price rose strongly through the late summer but has since drifted off.

A recent report suggests, at least for some investors, gold has been sidelined in favor of a metal with stronger industrial applications, in addition to demand for jewelry and as an investment product.

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In the World Platinum Investment Council’s (WPIC) latest Platinum Quarterly report, the WPIC states that from a surplus of 345,000 ounces for 2019, investment demand in particular has been so strong that platinum is estimated to come out with a deficit of 30,000 ounces for the full year.

A 12% increase in total demand has been driven by a substantial surge in ETF buying, such that overall consumption is still up despite a 5% fall in automotive demand, a 6% fall in jewelry and a 1% fall in industrial demand.

ETF buying was particularly strong in the first half of 2019, the WIPC reports, but has carried on into the second half with the increase in holdings of nearly 1 million ounces. Much of the buying has been by large institutional investors looking to diversify from negative yielding debt equity increasing their holdings of gold and platinum. Such buyers typically work on a two- to three-year timeframe and, as such, are judging platinum has medium-term strength (despite weaker automotive demand).

Automakers have seen a collapse in diesel car sales, particularly in Europe (diesel cars’ top market). As a result, platinum has and will continue to suffer.

Palladium, on the other hand, is more efficient for petrol engine catalytic converters and has, as a result, done relatively well out of the swing in engine type demand. But at some price point, generally taken when palladium is double that of platinum, the latter can be used in place of palladium – its relative lack of efficiency meaning you have to use more platinum to achieve the same level of gas detoxification as you do with palladium.

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Platinum demand has been strong but prices have not fared as well as the other PGMs, such as palladium and rhodium, which have relatively done much better.

Even the upbeat WPIC recognizes the platinum market will be in surplus next year and above-ground inventory is expected to rise as a result of lower investment demand.

In the near term, that may mean there is a cap to prices at least in 2020, but clearly investors are betting on an upturn in the first few years of the next decade.

Gold has been the metal to hold these last few months. While the base metals index has been at best trading sideways — and in many instances, gradually weakening — gold has been making a comeback.

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Even before Fed announcements in January 2019, gold had been rising during the second half of 2018, reaching a peak in January of over USD $1,320 per ounce (its highest level since May 2018).

CNBC quotes an ABN AMRO analyst who says “Supporting gold is the double whammy of lower dollar and the (Fed decision on) U.S. interest rates.”

It’s true to say there is an inverse relationship between the greenback and the price of gold; as the dollar falls, it makes dollar-denominated commodities like gold cheaper for foreign investors and the price tends to firm. In addition, if interest rates weaken, the gold price can firm as lower interest rates reduce the opportunity cost of holding non-interest-earning gold.

The Fed’s decision not to raise rates — with “weakened” economic conditions as the justification for putting rates on hold — is a position the market now sees extended well into 2019 (not only reduced interest rate expectations, but the value of the dollar).

SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, was at the highest price since June, according to Reuters, climbing 4.6% so far this month. That gain marked the biggest monthly gain since September 2017.

But investor interest has not been the only driver of demand.

In an effort to diversify out of dollar holdings, central banks — particularly emerging-market central banks — have been selling U.S. Treasuries and buying physical gold.

According to the Financial Times, central bank buying of gold reached its highest levels for almost half a century last year as Russia, Turkey and Kazakhstan led combined central-bank purchases of a net $27 billion worth of gold after sales by Australia, Germany, Sri Lanka, Indonesia and Ukraine, which sold a combined 15.6 tons are deducted.

Russia was by far the largest buyer, adding 274.3 tons last year, bringing official gold reserves to 2,066 tons, worth some $87 billion. At this level, Russia holds some 18% of its total reserves in gold. But if that sounds like a lot, compare it to Germany at 69% and the U.S. at 74%.

All these central banks have been selling dollars to fund their purchases, a move that has seen the greenback as a share of central bank reserve currencies fall to a five-year low in Q3 last year. Some eastern European countries joined the buying spree, making this year’s net purchases the highest since the U.S. moved off the gold standard in 1971, Reuters noted.

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There is nothing to say this has run its course. Heightened trade uncertainty and slowing global growth will continue to create favorable conditions for gold demand, both from investors and central banks, in 2019.

In times of uncertainty, gold has not lost it role of safe haven.

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This afternoon in metals news, London copper reached its highest price since late 2014, exchange-traded funds tracking palladium are losing cash and one analyst looks at how high zinc can go.

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LME Copper Keeps Rising

LME copper hit a three-year high Tuesday, lifted by strong Chinese steel prices and positive news from the mining sector, Reuters reported.

LME copper soared to $6,642.50 per ton, its highest since November 2014.

What’s the Deal with Palladium ETFs?

According to a Bloomberg report, investors have made quite a bit of money on palladium this year, yet ETFs that track the metal are losing cash, fast.

Why?

“The explanation for the outflows lies in part in the scarcity of physical palladium and a robust borrowing market that has developed among users and speculators,” the Bloomberg report states.

According to data compiled by Bloomberg, more than $49 million has flowed out of the two main palladium ETFs in the U.S. and Europe (the ETFS Physical Palladium Shares and the ZKB Palladium fund) through Aug. 21 of this year.

The Zinc Ceiling

Like copper, zinc has also had a record-setting time, recently hitting a high not seen in a decade ($3,180.50).

On Monday, Reuters’ Andy Home wrote about just how high zinc can be expected to go.

“But right now the LME zinc market is bubbling away with stocks falling and spreads tightening,” Home writes. “Volatility seems assured but can zinc return to the heady days of late 2006/early 2007, when the price peaked out at $4,580?

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The Chinese yuan weakened on Monday afternoon after its midpoint was set at its lowest level in half a year.

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China’s authorities sets the mark 0.87% or 594 points lower than last Friday, the biggest daily decline since late June in 2016. Traders are allowed to trade up to 2% either side of the reference point for the day.

The Hong Kong Interbank Offered Rate for offshore yuan, known as the CNH Hibor, plummeted to 14.05% from last Friday’s 61.33%, down 4,728 points.

The People’s Bank of China set the yuan midpoint at 6.9262, a sharp drop for the renminbi compared with Friday’s fixing at 6.8668.

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China’s central bank does not allow the currency to move more than 2% from its daily fixing in onshore trade. While policymakers cannot closely control offshore trade of the currency, it usually remains relatively close to its onshore counterpart.
Onshore, the dollar was fetching as little as 6.8679 yuan last week, compared with 6.9318 yuan at 9:54 a.m. today.

Investors are still giving platinum the cold shoulder and oil production likely hit its recent high in September. Oil likely hit an output record in September.

Platinum Still Not Trusted

Investors bruised by platinum’s dismal failure to capitalize on a five-month strike in 2014 are not convinced that stocks of the metal have shrunk enough to justify a return to the market, despite positive supply-side news this year.

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Uncertainty over how abundant stocks of the metal are is continuing to curb investment interest in the metal, with holdings of platinum-backed exchange-traded funds (ETFs) falling to their lowest since mid-2013 this month.

Oil Likely Hit an Output Record in September

The Organization of the Petroleum Exporting Countries‘ oil output is likely to reach its highest in recent history in September, a Reuters survey found on Friday, as Iraq boosted northern exports and Libya reopened some of its main oil terminals.

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The increase comes despite lower output in top exporter Saudi Arabia and this week’s OPEC agreement in Algeria to limit supply to support prices.

At Wednesday’s meeting, the Federal Reserve left interest rates unchanged and officials lowered the outlook for rate increases in the coming years.

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This outcome suggests that slow economic growth and low inflation are forcing the central bank to rethink how fast it can move rates higher. But let’s get to the point: how will this decision impact metal prices? The key here is that interest rates impact the value of the U.S. dollar which has a huge impact on metal prices.

Higher rates mean higher borrowing costs, which usually make a currency more attractive to investors seeking higher yields than in other currencies. So, basically, higher rates domestically (or expectations of a rate increase) normally translate into a stronger dollar which leads to lower metal prices. This happened in May, when the U.S. dollar strengthened amid new expectations that the Fed would raise rates in June or July. Consequently, base metals fell.

Industrial Metals ETF pulls back in May and recovers in June

The Industrial Metals ETF pulls back in May and recovers in June. Source: @StockCharts.com

However, in June, the dollar pulled back, as expectations for rate increases receded. A dismal May employment report, combined with concerns about the June 23 British referendum on whether to leave the European Union, made officials pause while they weighed when to raise rates. Now, although the Fed still sees two rate increases later this year, a greater number of officials see now one increase, rather than two.

The Fed’s Economic Pencil Sketch

These projections aren’t set in stone, but they do indicate how officials’ views are changing.The Fed doesn’t see rates going as high as it thought they would before and, if this trend continues, the dollar could continue to weaken which would support metal prices.

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The ongoing slowdown in China’s economy; the so-called Brexit vote set for June 23 and the next European Central Bank meeting in Frankfurt will be factors to watch for clues on whether the Fed will increase rates in the near futures. So far, unless something turns around, we continue to see metal prices supported by a weak dollar.

While London Metal Exchange warehouse queues have all but disappeared, with the exception of Vlissingen in the Netherlands for aluminum and New Orleans for zinc, the even better news is physical delivery premiums have dropped back closer to historically lower levels and more importantly taken on a flat, stable pattern.

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As Reuters’ Andy Home points out in a recent article, the reasons for the horrendous spike in physical delivery premiums last year were always contentious and, in reality, multiple in origin but arguably long load-out queues played a part, although we always maintained they were as much symptom as cause of a deeper malaise in the physical aluminum market.

Aluminum Premiums Easing

Still, the return to a steady $170-180 per ton level for the Midwest premium and a stable range of $90-120 per metric ton range for Japanese Port premiums is a welcome relief for consumers after the sky high levels of 2014-15 when Japanese rates hit $425 and the MW premium was well over $500. Read more

As gold continues to flirt with $1,300 an ounce, some major investors are making opposite bets on the investment metal in the SPDR Gold ETF.

Paulson or Soros Will Be Wrong About Gold

Gold bull John Paulson slashed his bets on bullion while billionaire investor George Soros and other big funds returned to the metal for the first time in years, filings showed on Monday, as prices staged their biggest rally in nearly 30 years.

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New York-based hedge fund Paulson & Co., one of the world’s most influential gold investors, slashed its investment in SPDR Gold Trust, the world’s biggest gold exchanged-traded fund (ETF), by 17% to 4.8 million shares, Securities and Exchange Commission filings showed on Monday.

China’s Largest Private Steelmaker: We Need Even More Gov’t Support

Jiangsu Shagang, the listed unit of China’s biggest privately-owned steel producer, said on Monday the Chinese government should provide steelmakers with even more support in their efforts to export products and shift capacity overseas. China’s massive steel sector has come under growing international scrutiny, with foreign steelmakers accusing the country’s firms of flooding the global market with cheap, subsidized steel and driving them out of business.

Gold prices jumped this week, extending their best start to a year in more than 30 years, the Financial Times reports.

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Encouraged by a sharp fall in the dollar and a doveish stance by the Federal Reserve, the metal climbed 1% to $1,262.77 an ounce as the dollar fell over 2% against the yen after the Bank of Japan decided not to further ease monetary policy.

Source: Financial Times

Source: Financial Times

Gold had continued a long decline last year from it’s peak in Q3, 2011, but along with all other metals it has rallied some 19% so far this year as investors have plowed back into gold-backed exchange traded funds, encouraged by a relaxation in the Fed’s stance on interest rates and, from that, the prospects for inflation in the medium term. Read more

After a disastrous year in 2015, industrial metals started off on the right foot in 2016. Indeed, every single base metal is up in price on the year-to-date.

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But, is this price rally just another dead cat bounce or the start of new bull market? and, what factors do we need to watch for more clues?

Sharp Rallies Are Usual in Bear Markets

Industrial Metals ETF - Price rallies during bear market

The Industrial Metals ETF – Price rallies during bear market (2011- today). Source: @StockCharts.com.

Since the commodity bear market started in the spring of 2011, we’ve had several price rallies in industrial metals (see the graph above), that made some people think that a new bull market was underway. It wasn’t. Sharp price rallies are not unusual in bear markets and, although base metals are showing strength, we need more evidence before confirming that this won’t be another bounce followed by further declines like we’ve seen before.

Crude Oil and Base Metals Move Simultaneously

The main driver causing metal prices to rally this quarter is the oil price recovery that’s been happening since February. Lower fuel prices have compounded the longest commodity slump in a generation as oil is also key input in the cost of producing industrial commodities. Read more