The market took the Fed’s post-meeting comments to be dovish, leading the US Dollar to slip 1% percent. Gold gained 2% in US dollar terms as USD weakness and Greek financial woes lent support to the haven..
asset. The complete stalemate in debt negotiations could see gold prices rise further. With Greece facing a number of payment deadlines this month, the country’s financial situation is looking more precarious than ever. However for now financial market are optimistic that a deal will be struck today. A sharp re-pricing of risk could materialize if such a deal is not reached. Gold is likely to reassert its traditional role of a hedge asset in such event, but for now demand has been surprisingly muted.
Platinum group metals see outflows amid price declines. Last week we saw US$8.7mn of outflows from long platinum ETPs and US$5.0mn of outflows from long palladium ETPs as prices fell 1.8% and 2.9%, respectively. While auto sales growth may not be as brisk as it was a year ago, falling energy prices should bode well for sales, especially of larger vehicles which require higher platinum and palladium loadings in their autocatalysts. Additionally, as we enter the notorious “strike season” in South Africa, mine supply of the metals could become constrained. We believe that sentiment is excessively negative and that there is a tactical opportunity for those who have the resolve to weather the near-term volatility.
Bargain hunting drives inflows into agricultural commodities. Three of the top 5 five inflows were into agricultural commodities last week. A depreciating Brazilian Real pushed coffee and sugar prices down 2.5% and 3.4%, respectively, while favorable weather (for now) is helping the Brazilian harvest. After rallying earlier in the month due to excess rain in the US, wheat fell 3.2% as more favorable weather materialised. Weather remains the key for fortunes in the agricultural space. The increased probability of El Niño lasting to the end of this year, raises the risk of weather-related crop damage and a number of investors have used this price dip as a tactical entry point. We saw US$5.4mn of inflows into long wheat ETPs (6-week high), US$4.9mn into long sugar ETPs (13-week high) and US$5.1mn of flows into long coffee ETPs (4-week high). Flows into broad basket agricultural ETPs hit US$9.6mn, a 5-week high, highlighting the broad-based interest in the asset class which has seen considerable price pressure over the past year.
Long oil ETPs see first net inflows in 12 weeks. While marking the first (long) inflows across the sector in 12 weeks, all the inflows were into WTI (US$5.6mn), and Brent ETPs continued to see redemptions (-US$0.3mn). Brent fell 1.3% last week, while WTI staged a more modest decline of 0.5%. We believe that oil prices will fall in the very short term as over-optimism about the pace of supply tightening gets reality check. Eventually as high cost producers outside of the US make credible cutbacks to
production, we see the price recovering.
Key events to watch this week. The evolving Greek debt saga will continue to be the focus of investor attention next week. The rising threat of an accident could crystalize fears of a Grexit which should be gold price positive. Elsewhere US durable goods and Chinese manufacturing PMIs will provide gauge for how the world’s largest economies are faring and likely demand for cyclical commodities.