ETP Weekly: Prepare for short-covering rallies

Bargainhunting investors are beginning to be attracted by lower commodity prices, with positive flows into agricultural baskets and silver signaling a belief that the bottom is near. Nonetheless, most commodity prices…

ETF Securities Research

continued lower in the past week and softer sentiment in some sectors prompted outflows. Gold remained under pressure last week, with all indications that the Federal Reserve’s policy stance will be tighter in 2015.
Ongoing concern over the outlook for China also weighed on the performance of industrial metals and industrially-inclined precious metals. We believe that with speculative shorts across many commodities having risen to multi-period highs, the prospect for short-covering rallies is high. Over the coming weeks, investors are likely to start building long positions with most commodity trading at or near the cost of production.  

ETFS Daily Short Gold (SBUL) saw its highest redemption since inception. After a protracted period of building up shorts on gold, investors pulled back as the price of gold approaches our estimated all-in cost of production and the widely watched support level near US$1,200/oz. US$47.7mn flowed out of SBUL, wiping out the seven months of flows into the short product. While investors continued to pare their long gold positions as well, with US$51mn leaving physical gold ETPs last week, taking further bets on a decline in price seems risky at this point.

Inflows of US$6.8mn for long agricultural ETP baskets indicates that investors see value in grains after falling to their lowest price levels since 2010. Marking the highest inflow in 9 weeks, we believe that sentiment is slowly turning. Investors have been buying wheat ETPs for 19 consecutive weeks now and there is a growing sense that all ‘good’ production news has now been priced in. Meanwhile sugar prices bounced up 6.6%, attracting a further US$0.9mn into ETFS Sugar (SUGA), marking 8 consecutive weeks of flows into the ETP. Sugar remains close to a 4-year low as the fifth consecutive year of surplus is expected this year.

ETFS Daily Leveraged Natural Gas (LNGA) saw US$4.6mn of inflows, the highest in 9 weeks,  as storage values came under expectations.  US  natural gas stocks increased by 97 billion cubic feet  in  the week ending September 19. That compared with an expected increase of about 100 billion cubic feet anticipated by analysts and sent prices 1.6% higher  last  week.  As we approach  winter, seasonal demand for natural gas will rise. A failure to build inventory or an unusually cold winter like last year could be key catalysts for sustained price increases.

Long nickel ETPs received US$1.4mn of inflows as the Indonesian government reiterated that the  ore export ban  from will remain.  Indonesia,  the world’s largest nickel producer, had implemented the ban in January this year and has unusually stuck to it in a  bid to develop domestic smelting facilities. Nickel prices nevertheless fell, along with other industrial metals on the back of softer-than-expected PMIs and durable goods data.

Key events to watch this week. US payrolls will be the centre of attention this week as the market judges the capacity of the US economy to absorb an interest rate hike that will eventually follow when the Fed finishes its period of extraordinary monetary support. A strong reading is likely to be US dollar positive and weigh on commodities priced in the currency. After the lacklustre take-up of the TLTRO (the ECB’s form or quantitative easing), the market will be keen to hear President Draghi’s view of the programme at the ECB’s post-policy meeting conference.


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