Gold ETFs record large outflows as investors favour alternative precious metals

Jul 15th, 2015 | By | Category: Commodities

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With a deal having been reached between the Greek government and Eurozone leaders, and swift action by Chinese authorities managing to subdue the slide of China A-shares, stability is beginning to return to commodity markets. That’s according to a recent report from London-based commodities specialist ETF Securities.

Gold-based ETPs record large outflows as investors favour other precious metals

Increased global stability and a gradual economic recovery are pushing investors away from gold-based ETPs

According to the report, the key driver of commodity prices and ETP flows is likely now to shift away from speculative flows and back to fundamentally-based principles, such as long-term industrial growth rates.

Specific events that investors will watch to allay their fears of further market jitters include the proposal of the Greek deal before parliaments within Europe, as well as upcoming industry data from China which may reveal less-than-encouraging growth.

Gold ETPs have recorded material outflows (there was an outflow of $43.6m from gold ETPs managed by ETF Securities last week) and gold prices have dipped slightly on the back of increased global stability, despite never truly rallying during the Greek debt crisis. Gold prices eased 0.1% lower, having never rallied during the Greek default or snap referendum. Gold’s safe-haven status has become less necessary in the more stable environment, explaining the move away from ETPs linked to the metal.

There are still many hurdles to cross for the newly struck deal to be passed into law. If it is rejected and this eventually leads to Greece exiting the euro, bringing the long-term sustainability of the monetary union into question, markets should react by pushing up risk premiums. But the likelihood of this, at least in the short term, appears minimal. In this scenario, however, gold-based ETPs would likely experience strong net inflows and rising prices.

Disregarding this eventuality, gold movements are expected to be mainly a factor of expectation of an upcoming Federal Reserve rate increase. The dollar and gold have historically shown an inverse relationship, and as rates increase in the US, so the dollar generally appreciates. A rise in key rates is therefore expected to weaken gold ETPs. Indeed, gold experienced its lowest price in June of $1,162 per ounce right off the back of a strong US payroll report on June 5th that indicated to the market an increased probability of rates increasing. Future hawkish comments from the Federal Open Market Committee will put further downward pressure on gold ETFs.

As investors have shifting funds away from gold, there have been inflows into ‘industrial’ precious metals as they expect global demand to increase as the economic recovery continues. Silver and platinum were favoured in this regard, with net flows to long silver positions positive for the fourth consecutive week. The ETFS Physical Silver (PHAG) recorded net inflows of $3m and the ETFS Physical Platinum (PHPT) $10.9m. ETFS Palladium (PHPD) recorded modest inflows of $1m. However, even at current low prices, these metals may respond slowly to the global recovery, with platinum-based and palladium-based ETPs showing the most uncertainty in the second half of 2016.

Silver, although possessing investment qualities similar to gold, is also used in a wide variety of industrial goods and processes. Over 50% of silver’s demand is attributable to these purposes, from non-corroding electrical switches to chemical-producing catalysts. In comparison, only around 10% of the global demand for gold is for industrial means. With stability returning to the market, this metal will respond more to fundamental price drivers. The wide use of silver in a variety of industries compels demand to respond fairly linearly to global growth rates, making a compelling case for a less volatile gradual recovery in price of silver-based ETPs.

Meanwhile, the platinum market is seeing robust output levels due to South African supply, accounting for roughly 60-65% of world production, having rebounded from the reduced levels caused by trade union strikes in 2014. A stronger dollar (and weaker South African rand) on the back of a Federal rate rise could spur producers in South Africa to further boost output in the second half of 2015, causing an oversupply. For these reasons ETFS Physical Platinum remains a relatively riskier investment.

Palladium, another of the platinum group metals, has experienced one of the most bearish markets in precious metal commodities in 2015; the ETFS Palladium is down 19.4% since the start of the year, with price drops accelerating in recent weeks. Investors are not rushing to buy into this ETP compared with other precious metals indicating that, despite falling prices, ETPs following this precious metal may still not be in bargain territory. Demand for palladium is facing an uncertain second half to the year. About 65% of palladium demand is for auto-catalysts, reducing harmful emissions from cars, with the US, China, Europe and Japan being major buyers; however, slowing growth in China, coupled with a recent drop in Chinese equity markets, which may affect purchases of consumer discretionary goods such as cars, are causing uncertainty for traders wishing to play this metal market.

The markets for these three metals remained bearish during the week ended Monday 13th July, indicating the economic recovery will be a measured process. ETFS Physical Silver was down by 1.5%, ETFS Platinum dropped by 4.7%, and ETFS Palladium fell 6.7%. They have responded positively in the last two days, however, hinting at the possibility that the long-running bear market could be slowing or even about to reverse.

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