Precious metals exchange traded funds have regained their footing and may continue to shine as favorable fundamentals help support the hard assets.
For instance, on the recent webcast, Outlook 2016: Don’t Believe the Hype, James Butterfill, Executive Director and Head of Research & Investment Strategy at ETF Securities, argues that deflationary risks have been exaggerated and we are heading toward inflation.
“Aggregating core CPI, or inflation, highlights a trend of rising core CPI in both the developed and emerging world,” Butterfill said.
As hard assets, precious metals have provided investors with a safe store of value, helping preserve wealth in times of rising inflation. Looking ahead, Buterfill projects inflation to likely hover above 1%, with the Consumer Price Index rebounding this year.
Moreover, while China, a major commodities consumer, has weakened over the past year, the emerging market’s appetite for raw materials has not abated.
“Despite declining over the past year, China demand growth for the ‘big four’ metals – aluminum, copper, zinc and lead – remain strong at 8.5% year-over-year to Q3 2015,” Butterfill said. “It looks committed to its plenary reform packages, particularly if it aims to achieve 6.5% GDP growth through 2020.”
China has issued a 6.5% to 7% growth target for 2016, Bloomberg reported.
On the supply side, Butterfill argues that the extended low commodity price environment may force many producers to cut back on production. The curtailed mining activity will likely have a negative long-lasting effect on the supply side.
“Many commodities are now trading below their marginal cost of production,” Butterfill added, “suggesting it’s only a matter of time before we begin to see supply side destruction.”
For example, the platinum-group metals, which include white metals platinum and palladium, are in a supply deficit for the fourth consecutive year.
The Federal Reserve interest rate hikes have also been a focal point for commodity observers. However, while the U.S. dollar index has typically remained flat or rallied pre-rate hikes, the USD has often sold off afterwards, which helped support USD-denominated precious metals.
Furthermore, Butterfill pointed out that precious metals have also strengthened during a Fed rate hike cycle.
“Gold is suprpsing however, typically rising 14%, going against conventional thinking,” Butterfill said. “Real interest rates over these periods remain flat or negative maybe one reason for gold’s performance.”
Investors interested in accessing the various precious metals have many ETF options available. For instance, ETF traders can gain targeted exposure through the ETFS Physical Silver Shares (NYSEArca: SIVR),the ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), ETFS Physical Palladium Shares (NYSEArca: PALL) and ETFS Physical Platinum Shares (NYSEArca: PPLT).
Mike Cameron, Head of Institutional Sales at ETF Securities, explains that the key difference for commodity ETFs lie in the vaulting. For example, the physically backed gold ETF SGOL is backed by bullion bars stored in Swiss vaults. ETF investors are also provided with full transparency into up-to-date bar lists, and vaults are randomly inspected.
Potential investors, though, should be aware that physically backed metals ETFs are treated as collectible investments, so they are taxed at a 28% long-term rate or a 35% short-term rate.
Financial advisors who are interested in hearing more about investment ideas for 2016 can listen to the webcast here on demand.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.