Bargain Hunting in Copper, Silver ETFs

ETF Trends

Fears over a premature withdrawal of central bank stimulus and a softer economic outlook for the Chinese economy hit a number of commodity sectors last week.

Concerns about demand weakness in China appear overdone and cyclical commodities may see some support in coming weeks as investors become more optimistic about emerging economy growth. The release of the latest IMF economic growth forecasts support the view that recovery will continue in 2013.

Despite a modest reduction in growth forecasts for most regions, growth is expected to be strong in key emerging markets such as China, with Eurozone growth unsurprisingly seeing the largest growth downgrades. With the economic outlook still strong, recent price declines, particularly for cyclical commodities, are being seen as attractive entry points to establish new long positions.

Long copper ETCs receive largest inflows in three months, totalling US$40mn. While sentiment remains fickle in financial markets, the trend toward rotation into more cyclical areas of the market and recent weakness in copper prices is prompting new inflows. The Chinese growth fears that drove the recent copper price decline appear overdone, while the supply picture does not appear as rosy as a few weeks ago. Although copper inventories have experienced strong gains in recent months, strikes in Chile and a mine wall collapse in the US may remove the supply surplus forecast only a few weeks ago. [Copper ETF Slump]

Bargain hunting drives long silver ETPs inflows to 17-month high, totalling US$25mn. Silver bucked the precious metal trend last week as bargain hunters saw the 30-month price low as an attractive entry point. A near 15% price slump in the silver price over the past week has sparked a strong buying reaction, as investors continued to accumulate positions in what is the second largest globally held exchange-traded commodity after gold. While gold’s recent price decline was the catalyst for silver’s weakness, six weeks of consecutive net inflows indicate investors believe its broader industrial demand base could become the catalyst for future gains.

Gold remains out-of-favor as outflows reach 8-week high. Investors withdrew US$239mn from physically-backed gold ETPs last week, as the gold price reached a 26-month low. While there are reports of strong physical demand in countries such as India, futures market positioning remains bearish.

Key events to watch this week: The widening divide in growth between the US and the Eurozone is again likely to be highlighted this week, with Eurozone manufacturing indicators expected to show the sector firmly in contraction territory. In contrast, US Q1 GDP is expected to show the world’s largest economy grew by 3% annualized over the period. As highlighted in the G20 communique, continued policy uncertainty and fiscal sustainability remain key constraints to growth and this divide is unlikely to be bridged in the foreseeable future.

ETFS Physical Silver Shares (SIVR)

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