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Sabre-rattling drives gold inflows to three-week high

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In its weekly update, ETF Securities writes that gold inflows have risen to a three-week high as investors seek a haven asset amid continued sabre-rattling.

Although gold prices erased most of its past months gains, inflows into gold ETPs rose to USD39.3 million, the firm says. The US Federal Reserve announced the start of its quantitative tightening programme – allowing USD6 billion of Treasuries and USD4 billion of mortgage-backed-securities to run off its balance sheet in October.

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. ETF Securities writes that the odds for a December rate hike have risen substantially (from 35 per cent a month ago to 70 per cent currently according to Fed Fund futures). Gold fell 1.7 per cent as US Treasury 10-yr yield rose to 2.27 per cent from 2.03 per cent.

However, ETP investors used the price weakness last week to increase their holding of ETPs as geopolitical risks do not seem to be fading, the firm says.

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 once 0.5 per cent on Friday as markets switched their attention back to geopolitics.

Turning to oil, ETF Securities writes that oil prices have rallied close to 5 per cent over the past fortnight as markets have become more optimistic about demand recovering and OPEC countries sticking to their pact to curb supplies.

Investors sold USD21.7 million of oil ETPs as they took profit. Iraq has publically supported an extension of the current quota, lifting markets expectations about the outcomes from Friday’s OPEC Joint Ministerial Monitoring Committee (JMMC). However, Iraq has not complied with the current quota, leaving it to a poor spokesperson for deal extension, the firm notes. 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.

Industrial metal ETPs saw third consecutive week of outflows. As prices of industrial metals continued to decline, investors pared back their positions. However, outflows last week of USD9.8 million were relatively small compared to USD117 million and USD119 million in the prior weeks.

“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,” ETF Securities concludes.

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