Precious metals surge on weaker USD and investor inflows
An interesting switch has been taking place within the commodities complex in recent weeks. In the first part of this year, base metals prices surged on the back of increased optimism about the economic outlook and the introduction of government stimulus packages. The base metals index, LMEX, rose by 62% in the first seven months of the year. By contrast, the precious metals, especially gold, were treading water. The cyclical markets outperformed by a large margin.
However, the past month has seen the tide turn. LMEX has been trading in a range, and prices are currently little changed from early August. Meanwhile, investors have been targeting precious metals more directly. Last week saw gold convincingly break above USD 1,000 per ounce for the first time this year, and platinum and silver have both pushed to fresh 12-month highs, as the USD fell to new lows against a number of currencies. Gains in precious-metals prices have been twice those seen for base metals in the past month. What is clear is that investor inflows into the precious-metals markets have been very robust. Data for US exchanges shows that net speculative positions rose to record levels for both gold and platinum in the first half of September. By contrast, the net long position for all commodities is down by 8%, while net longs in oil have fallen by 16% and net shorts in copper have increased. The precious-metals markets have also been buoyed by investor flows into physical ETFs. Data from ETF Securities shows robust inflows across the board. This seems counter-intuitive, given that the macro-economy has steadily improved in recent months and confidence in the outlook has risen (as reflected in strong rallies in equity markets and economic indicators surprising on the upside). Safe-haven buying should be fading, but this does not show up in the most recent flow data. One reason may be simply that the USD is taking over as the main driver for the time being, and investors are betting on further weakness. This is consistent with the view that the USD will soften further for the rest of this year.
Precious metals have a particularly strong correlation with the USD. In the last three months, gold’s correlation with EUR-USD has been running at 65%, while silver and platinum are at 63% and 57%, respectively –much stronger than the correlations between the greenback and base metals. It may also be that investors are starting to pare back their exposures to markets that are particularly driven by the industrial cycle, or are starting to worry about a potential pull-back in base-metal prices after recent strong rallies. Either way, it will be interesting to watch how this pans out in the next few weeks
|
Linear Mode
