The ECB cut interest rates for the first time since July 2012 and left the door open for more action including imposing negative rates on commercial banks.
The cut from 0.75% to 0.50% boosted precious metals as some investors looked to hedge against ongoing economic uncertainty. The gold price rise was somewhat more muted compared to when the ECB cut rates in July 2012, as the bearish tone for gold lingers.
Despite obvious risks to the global recovery, investors are shunning gold, believing that the extremely accommodative central bank policy can circumvent another crisis and at the same time avoid generating inflationary pressures. Signals that the Fed may be ready to curb purchases as the outlook of the labor market improves also contributed to the bearish sentiment towards gold. However, physical gold buying remained strong, physical coin, bar and jewellery buying in Asia, the US, Europe and the Middle East rising to multi-year highs.
Gold ETPs register the biggest outflow since October 2009 as investors become more positive on global growth. The US job market showed continued signs of recovery last week, with US employers adding 165,000 jobs in April and prior data being revised upwards. ETP investors reduced gold exposure in favor of more cyclical commodities like platinum and industrial metals, as higher-than-expected US manufacturing activity in April, added to the optimism. While gold ETPs saw US$323mn of outflows last week, daily volumes of trading on the Shanghai Gold Exchange remained elevated and premiums were reported to be around $34/oz last Thursday. Demand from India is likely to see a seasonal lift due to the Akshaya Tritiya festival which falls on May 13 and last week’s Reserve Bank of India interest rate cut is likely to further boost household balance sheets of gold-hungry physical buyers.
Expectations of production cuts in South Africa prompt US$15.5mn of inflows into Platinum ETPs. Anglo Platinum (“Amplats”), the biggest platinum producer, recently announced its intention to cut up to 300,000 ounces of the metal off the market. With operating costs now standing US$400 above current market prices, more producers might follow Amplats’ example. While the situation in South Africa seems to have improved considerably as of late, the strike season in the country, which normally starts in June, is fast approaching. Last year, the impact of the illegal strikes on production and the platinum price was substantial. South African disruptions remain a potential short-term catalyst for PGMs price upside, mostly for platinum.
Industrial metals record US$8.6mn of inflows on higher than expected manufacturing numbers in the US. At the same time, both copper and nickel ETPs saw strong outflows, totalling US$5.5mn and US$16.9mn, as investors favored diversified cyclical exposure. Concerns over China’s slowdown, which accounts for 44% of global nickel consumption, pushed nickel prices to the lowest level since July 2009 last week. At current levels, potential production cut backs should help stabilize nickel prices.
Long WTI crude ETPs record US$11.2mn of outflows as US crude oil stocks climb to an 82-year high. With US production levels close to a 21-year high, excess supply remains an issue for WTI. Rising imports combined with relatively restrained refinery capacity boosted stockpiles to the highest level since 1931. At the same time Brent ETPs received inflows of US$3.9m as current prices attracted bargain hunters.
Key events to watch this week: Investor attention will be focused on the Bank of England rate decision. However, with UK inflation steadily above the target, a decrease in interest rates is likely to be off the table. Eurozone manufacturing data will also watched closely as any sign of economic weakening might prompt further monetary stimulus from the ECB. The G7 finance ministers and central bank governors meeting will conclude the week and the global financial crisis and sovereign debt resolution measures will be once again at the center of discussions.