Attractive Fundamentals Could Further Support Precious Metals ETFs

After a volatile start to the year, precious metals exchange traded fund advisors will have to consider factors beyond market risks.

On the recent webcast, June Update: Central Bank Separation Anxiety, James Butterfill, Head of Research and Investment Strategy at ETF Securities, pointed out that world growth has stabilized, the likelihood of a global recession has diminished, and core CPI will likely continue to steadily rise.

Consequently, as growth improves and inflation rises, we are back to waiting for an eventual Federal Reserve interest rate hike, which may trigger market fears over policy mistakes and potential pressure growth.

For the precious metals market, traders will have to keep close tabs on the Fed as gold has been closely correlated to real interest rates. We have seen gold outperform in negative interest rate periods.

Furthermore, some precious metals are also affected by factors beyond investment demand. For instance, Butterfill pointed out that silver enjoys heavy industrial demand – about 56% of total demand for silver comes out of industrial fabrication, followed by jewellery 20%, coins & bars 18% and silverware 6%. Nevertheless, silver remains correlated to gold’s fortunes.

Platinum and palladium also enjoy heavy industrial demand, notably out of the automobile industry where the precious metal is used as an autocatalyst to remove harmful emission particles.

Looking ahead, Butterfill argued that we will likely see diminished supply for precious metals like gold and silver as the marginal cost of production rises. As it gets harder and harder to dig out metal ores, the mining sector will have to see significant increases in prices before it becomes profitable to produce more, potentially leading to a supply-side reduction. Butterfill also pointed out that capital expenditures among the top 100 miners is on the decline and will likely continue.


Consequently, ETF Securities believes that precious metals fundamentals look attractive and gold will likely remain resilient, especially after commodity prices have hit a trough.

Related: Gold Demand is Robust