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Gold outflows mark unwarranted pessimism

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Nitesh Shah, Associate Director – Research Analyst at ETF Securities, observes that the traditionally defensive asset, gold, has seen a second consecutive week of outflows. It’s usually seen to perform poorly in higher real rate environments, but Shah believes that pessimism for the metal could be misplaced. 

He writes: “As the first Federal Reserve rate hike in nine years approaches, many investors are turned off the metal given its historic negative relation with long-term US Treasury yields. However, we would caution that tightening short-term interest rates may not simply translate in higher long-term nominal rates given the role of Treasuries as a policy tool, which could limit the downside for prices.
 
“Inflation on the other hand could rise more rapidly than widely expected. The simple rolling out of the base-effect from lower commodity prices a year ago is likely to push headline inflation from 0.2 per cent in October 2015 to 1.5 per cent by January 2016. Real Treasury yields could therefore remain depressed. We have observed that in previous rate hiking cycles (when rates are increased from very low levels) that the US Dollar actually depreciated (contrary to conventional thinking). If history is any guide to the future, gold and commodities in general could perform well when rate rise fears crystalise.”
 
Last week saw more investors return to commodity markets, the company says, with the ETFS Longer Dated All Commodities GO UCITS ETF (COMF) receiving USD24.2 million last week in an indication that more investors are convinced that commodities have hit a turning point.
 
The company writes that year-to-date inflows into diversified commodity baskets have risen to USD429.2 million this year, compared to USD206.1million in 2014, USD53.5 million in 2013 and an outflow of USD21.6 million in 2012.
 
“We have observed clear signs that a turning point is in sight for the beleaguered asset class. The prolonged period of underperformance has driven miners, smelters, drillers and other resource extractors to cut capital expenditure (capex), sowing the seeds for supply tightness in years to come. The cuts to capex are already biting into supply and it is a matter of time before there is a price-response,” ETF Securities reports.
 
Ahead of the OPEC meeting, oil ETPs saw continued inflows for ETF Securities. “We received a further US$16.8 million of inflows into long Brent and WTI oil ETPs. WTI gained 6.2 per cent, while Brent gained 2.9 per cent as Saudi Arabia softened its tone on encouraging the world’s high cost producers to cut back on production. However, we don’t read its recent comments as an indication it will push for OPEC supply cuts this week. In fact we believe that Saudi Arabia won’t end the price war until it sees non-OPEC supply cut severely (which will be price positive) or it has run out of fiscal might (the latter will be some time in 2018).”

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