Although gold prices erased most of the past month’s gains, inflows into gold ETFs rose to $39 million in the week beginning 18 September 2017, marking a three-week high, according to weekly flows analysis from ETF securities.
Nitesh Shah, commodity strategist at ETF Securities.
Nitesh Shah, director, commodity strategy at ETF Securities, said that investors were seeking a safe-haven asset in light of geopolitical tensions despite action from the Fed that was bearish for gold.
The week included the announcement of the US Federal Reserve’s quantitative tightening programme, allowing $6bn of Treasuries and $4bn of mortgage-backed securities to run off its balance sheet.
Shah commented: “The Fed also indicated that it will see-through the relatively tame current inflation readings and potential temporary hurricane-related economic weakness and focus on how the tightness in the labour market will increase inflationary pressures.”
The odds for a December rate hike have risen substantially, from 35% a month ago to 70% currently, according to Fed Fund futures. Gold fell 1.7% as US Treasury 10-year yield rose to 2.27% from 2.0%.
Shah added, “ETF investors used the price weakness last week to increase their holdings of ETFs as geopolitical risks do not seem to be fading. Following President Trump’s threat to “totally destroy” North Korea, Kim Jong Un said he would pay dearly for his speech and reciprocated with a threat to test a hydrogen bomb in the Pacific Ocean. Gold rose by 0.5% on Friday as markets switched their attention back to geopolitics.”
ETF Securities offers investors gold exposure through a range of physically backed and swap-based products. The largest is the ETFS Physical Gold (LON: PHAU), which was launched in April 2007. The fund currently has $5.9 billion in assets under management (AUM) and has a management expense ratio (MER) of 0.39%.
The week also saw $22m flowing out of oil ETFs as investors continued to take profits following a rally of nearly 5% over the past fortnight as markets have become more optimistic about demand recovering and OPEC countries sticking to their pact to curb supplies.
“Iraq has publicly supported an extension of the current quota, lifting markets expectations about the outcomes from Friday’s OPEC Joint Ministerial Monitoring Committee (JMMC),” said Shah. “However, Iraq has not complied with the current quota, leaving it a poor spokesperson for deal extension. Friday’s meeting was unlikely to yield any real policy moves as it was not designed for making new decisions.”
The next major policy-deciding OPEC meeting will take place in November. Without an extension to the deal, global oil markets are likely to return to a surplus.
Other notable flows included a third consecutive week of outflows from industrial metals ETFs. Investors continued to pare back their positions as prices of industrial metals maintained their recent decline. However, outflows of $10m during the week were relatively small compared to $117m and $120m seen in the preceding weeks.
Shah said, “We believe that metal prices are making a short-term pull-back as momentum trades are shaken out of the market after a strong rally that commenced in June. Investors are likely to gain a better entry point after this pullback. With widening supply deficits and continued strength in demand the fundamentals for industrial metals remain firm.”
Investors looking for industrial metals exposure could try the ETFS Industrial Metals (LON: AIGI) which was launched in September 2006 and has $253m in AUM with an MER of 0.49%.