Gold ETFs Attractively Valued as Macro Risks Linger

ETF Trends

The resurgence of risk appetite over the past month has seen an ongoing rotation in the precious metals sector toward more cyclical exposures.

Investors have been increasing palladium positions at the same time as a general clearing out of net long COMEX gold speculative positions occurs. Net long gold positions have hit the lowest levels since December 2008, as investors seem positioned for ‘the worst is over’ scenarios. The gold price remained under pressure as some investors again overreacted to the latest release of the FOMC minutes, believing discussions about the timing of stimulus withdrawal indicates a premature end to the Federal Reserve’s economic support.

Bargain hunters have begun to emerge, giving some stability to the gold price around US$1,575oz, and trading turnover on the Shanghai Gold Exchange hit a daily record last week. While the technical picture fueled the liquidation of gold holdings and the subsequent price decline, macro fundamentals suggest a potentially attractive entry level, as global financial markets remain awash with liquidity, global interest rates expected to remain extremely low for the foreseeable future and key macro risks lingering, particularly for the Eurozone economy that is likely to remain in recession in 2013 according to the European Commission.

The failure to avert the automatic spending cuts that will take place this week (March 1st) in the US is a cogent reminder that policy paralysis could stop the global recovery in its tracks. The UK losing its prized Aaa rating from Moody’s last week is also likely to temper risk appetite and further add to the attractiveness of US Dollar denominated precious metal assets. While the Fed may be discussing QE exit scenarios, the Bank of England looks more likely to increase its activities, with 3 members out of the 9 voting to raise the scale of asset purchases. With Sterling at a 2-year low against the US Dollar, unhedged precious metals positions remain an attractive option for UK-based investors.

‘White’ precious metals in high demand. Despite a sizable fall-back in prices across the ‘white’ precious metals space last week, platinum ETPs holdings remain at an all-time high and silver holdings are within a whisker of new record levels. The modest reduction in speculative net long futures positions in platinum contrasted with fresh record palladium net longs and record high ETP holdings for platinum. The fundamental outlook for PGMs remains solid, particularly palladium. With South African supply disruptions a persistent threat and autocatalyst demand showing signs of recovery, palladium appears well placed for gains. The latest Swiss statistics confirmed market suspicions that Russian palladium stocks might be close to exhaustion, as Russian exports of the metal were zero last month.

Further gold import duties in India remain a risk. India, the world’s largest gold buyer, is due to present its budget on February 28th. Concerned with a widening current deficit, there is speculation that the government may increase the duty on gold imports once again, raising the levy to 8% from 6%.

Key events to watch this week: The Italian general elections will be closely watched given the risk to investor sentiment that could follow from a disruption to the current policy course prescribed by the technocratic government. The “sequestration” that will come into force in the US on March 1st will be closely monitored given the risk to unraveling the nascent recovery should further automatic spending cuts or tax increases fail to be averted.

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