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Nicholas Brooks, head of research and investment strategy at ETF Securities

Investors should maintain gold hedge

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ETF Securities has established itself as one of the true pioneers in the commodity ETP arena. Commodities dominate the firm’s product suite of 278 ETPs with 100 individual ETCs available to investors.

As to where investors should be focusing their attention in commodities, Nicholas Brooks (pictured), Head of Research and Investment Strategy at ETF Securities notes that despite investors’ increased appetite for riskier assets – in particular US equities – a straight-line economic growth trajectory is not necessarily guaranteed.
 
“On the one hand cyclical commodities like industrial metals and platinum and palladium are attracting strong interest because most investors haven’t given up on a bullish global macro scenario.
 
“On the other hand, while everyone was talking at the end of 2013 about gold being a great short, since the beginning of 2014 gold has in fact outperformed most other assets, and we have seen a noticeable change in investor sentiment. True to its nature as a diversifier, so far this year gold has been one of the better performers as equities have dropped. So it appears we are now seeing a more constructive view towards gold,” says Brooks.
 
As a general theme for 2014, Brooks advises investors to remain long cyclical commodities but maintain a position in gold to hedge against any further set-backs to the consensus strong US global growth recovery scenario.
 
What investors need to grapple with, when looking at commodities, is how much further upside there will be in the US (S&P index gained around 24 per cent in 2013) and Europe versus further downside in emerging markets.
 
“In our view China will likely sustain healthy GDP growth of 7 to 8% this year despite continued efforts by the government to clamp down on the shadow banking sector,” says Brooks. “Commodity prices have had to adjust to the slowdown in China GDP growth from the 10%-12% range and increases in the supply of a number of key commodities over the past three years. However, if recovery in the West continues and China sustains its current growth momentum, we expect demand to drive commodity prices higher.
 
“The two metals we feel most bullish on are platinum and palladium, both of which are facing large supply deficits. We think those deficits will get larger, eventually forcing prices higher.”
 
Platinum is often viewed as a strong play on European automobile demand, which appears to have hit the floor. Couple the potential increase in demand with supply issues in South Africa where 70% of supply is produced and platinum could enjoy some upward price momentum according to Brooks.
 
Then there’s gold. Within emerging markets, China still has huge demand for this safe haven asset. This can partially be explained by China’s crackdown on its banking system, which is pushing investors into gold. As China liberalises its markets and opens up to the West, import quotas are likely to be relaxed.
 
“On the base case scenario that the global economic recovery continues in 2014 we think platinum, palladium and copper have good upside potential.
 
“To hedge against the risk that this consensus view is wrong, we think gold is an attractive choice. The gold price has dropped 30 per cent and is trading below its marginal cost of production so we are at the lower end of the gold price range. For medium to longer term investors, it’s worthwhile looking at gold again,” concludes Brooks. 

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