The G20 meeting set the tone for what’s to come this year: emerging markets are getting tired of competitive currency devaluations by developed market central banks and they will likely continue to build gold reserves that may offset potential currency debasement. Currency debasement appears to be an unintended consequence of the loose monetary policy needed to lift sluggish developed market economic performance.
However, monetary policy is expected to remain loose for a long time yet. World Gold Council data showed that official sector purchases of gold rose 29% year on year in Q4 2012 (and a full year rise of 17%). The emerging market central banks of Russia, Mexico and Brazil were the key buyers.
Whereas a cyclical upswing may be diverting some investors to more risky assets, central banks are keenly buying gold, placing a floor on prices. While most high frequency data releases indicate that the global recovery remains on track, the hard data on Q4 GDP in Japan and Euro area fell below expectations, dampening the buoyant market mood.
The uneven flow of economic data demonstrates the fragility of the recovery. Investors are therefore likely to continue to hold defensive assets like precious metals while adding cyclical portfolio exposures as an insurance against an unraveling of the nascent recovery.
Physical palladium ETPs saw US$24m of inflows as auto demand in China and the US favour the ‘secondary’ metal. While CFTC net long non-commercial positions in both platinum and palladium have grown to the highest levels on record (data since 1995), investors in ETPs are clearly favoring palladium. There were US$11.4m redemptions from ETFS Physical Platinum (PHPT) and US$25m inflows into ETFS physical palladium ETPs. Palladium is used in the manufacture of gasoline autocatalysts that dominate the US and Chinese markets. Platinum’s primary demand comes from diesel autocatalysts that dominate the European markets. The lackluster sales of autos in Europe has made palladium a relatively more attractive investment. While both metals are forecast to be in deficit this year, the fact that palladium is mined as by-product of platinum and nickel operations, means that it is vulnerable to supply shocks from either metal. [Palladium ETFs and Auto Sales]
Inflows into industrial metal ETPs hit a 5-month high, totalling US$86m. Despite the choppy economic data, investors were keen to accumulate cyclical assets, lifting flows to into ETFS Industrial Metals (AIGI) to a 2-year high of US$23.3m and raising flows into ETFS Copper (COPA) to US$38.5m last week. As the global recovery gains traction we expect flows into industrial metals to continue.
The rotation toward cyclical assets sees US$9.9m into silver ETPs and outflows of US$73.6m from gold ETPs. Silver with its industrial uses was favored by investors as they move into more to cyclical assets.
Profit taking drives US$6.6m out of ETFS WTI Crude Oil (CRUD). After 9 consecutive days of gains, investors looked to reduce long positions. Expectations of a near-term correction appear to be developing, with ETFS Daily Short WTI Crude Oil (SOIL) seeing outflows of US$9.9m. With crude prices trading near the top of recent ranges, an unexpected jump in the price of WTI could also trigger comments about deployment of strategic reserves. Downside pressure also rose as WTI stockpiles increased last week and remain above longer-term averages.
Key events to watch this week: A number of surveys will help confirm the strength of the global recovery including the Euro area and US PMIs and German IFO and ZEW business sentiment surveys. Meanwhile the minutes of the January FOMC and February BoE meetings will attract a lot of interest given the over-interpretation of the previous month’s minutes when central banks first started to discuss the timing of an exit from QE.