ETF Securities Director – Commodities Strategist, Nitesh Shah, has commented on why investors are selling out of gold and oil ETPs and seeking opportunities elsewhere.
“Investors sold USD15.9 million of gold ETPs, locking in profits after a 19.5 per cent return since the beginning of the year,” Shah writes. “At the same time they increased holdings of long silver ETPs by USD12.2 million, marking the fourth week of inflows, as the metal is progressively catching up its yellow counterpart. Silver price gained 3 per cent last week while gold ended the week flat belying the volatility of gold over the course of the week. Last week saw gold falling ahead of the Federal Reserve’s policy meeting on Wednesday.
“However, the reluctance of the central bank to follow through with the rate tightening cycle it embarked on in December 2015, led investors to believe it is making a policy mistake. As a result, gold rallied 3 per cent after the announcement. Despite upgrading its view of general price strength, the Fed downgraded the number of times it expects to raise rates this year. Labour market strength combined with robust and rising core inflation leads us to believe that the Fed should hike more and sooner than the market expects (the next rate rise is expected in September). A policy error in the making is likely to be gold price positive.”
Nitesh adds that there was the third consecutive week of outflows from oil ETPs last week.
“The USD22.6 million withdrawal was entirely from WTI oil ETPs. After a 31 per cent rise in WTI prices in the last month alone, investors were keen to lock in profits. Investors into oil ETPs have always tended to be contrarian, which is reflected our flows. While the market is becoming increasingly optimistic that oil supply can come closer to balance this year as US production declines, Iran’s lack of cooperation with the rest of OPEC to freeze production remains a wild-card and has led some investors to pare back on oil holdings.
“We believe that Iran overestimates its ability to ramp-up production and exports to pre-sanction levels as the upgrade of existing operable fields and the need for further infrastructure build requires funding that is not supported by the economics. The increase of Iranian oil production in the coming year will likely miss target.”