Silver ETFs

Precious metals ETFs are increasingly pricing in the potential for tapering of Fed bond buying.

A weaker US dollar, declining equity prices and improvement in Chinese economic data supported precious metals (PMs) last week. Silver led the PM sector higher, rallying 4.4% to end the week back above US$20/oz.

Gold shrugged off what appeared to be coordinated fed-speak regarding potential tapering of the QE bond buying program in September, ending the week unchanged but above US$1,300/oz. Supported by improving global economic prospects and strong physical demand, the more industrial sensitive PMs also benefited from rising sentiment. Platinum bumped up against US$1,500 resistance for the first time since June, gaining 3.9% on the week and widening its premium above gold to 14%.

The PM market recovered from weakness earlier in the week, benefiting from a growing sentiment shift favoring the PMs relative to equities.  With the backdrop of very low equity volatility and the S&P 500 up 19% on the year compared to a 21% decline in gold, we expect the performance differential between gold and the S&P 500 to narrow rather than widen as the market increasingly prices in the reduction of US Federal reserve accommodation.

US physical coin demand hits record level.  US mint sales of silver coins   reached a fresh record at the end of July on a cumulative 12-month basis (see chart below). Bargain hunters appear to have been waiting in the wings in a similar fashion to 2008 (see chart). In 2008, silver fell about 50% from US$20/oz. to US$10/oz. subsequently rallying back to US$20/oz. by the end of 2010 as US Mint silver sales reached new records. Over 50% of silver demand is more inelastic though, derived from industrial usage. Gold demand is more price sensitive, being derived from investment and jewelry use, and demand from China is running about double 2012 levels. The amount of gold imported by China from Hong Kong in the first half of 2013 has roughly matched import totals for the entire 2012 year. China gold imports in 2013 are likely to account for about 1/3 of total global demand, up from about 20% in 2012 (see chart on page 2). Net Chinese gold imports should also surpass imports from India in 2013 for the first time since 1990, garnering additional support from the rising Chinese Renminbi.

Platinum Group Metal (PGM) markets remain tight. Many precious metals miners have reported asset write downs for H1 2013, highlighting difficult business conditions as price and productivity declines impact valuations. Both metals have a strong industrial base and a renewed upswing in the Chinese economy would be supportive of demand. China is the world’s biggest auto market and a large consumer of platinum for jewellery. More upside potential could also come from South Africa, should negotiations between unions and miners turn heated.

Key events to watch this week. The market will be watching for additional clarification of potential fed tapering, with the release of industrial production (IP), retail sales and CPI in the US. Eurozone GDP and IP will also be the focus, to see if the recent strong data was an aberration.