Gold ETFs Rally as Investors Reassess U.S. Rate Outlook

ETF Trends

The gold price posted a second consecutive weekly gain on the back of sustained monetary accommodation comments from FOMC chairman Ben Bernanke and a weaker US dollar.

The nearly 7% gain over the past two weeks is the largest gold price rise since November 2011. Gold ended last week just under US$1,300oz and appears to be building a firm base above US$1,200oz. Substantial physical demand, notably from China, increased central bank buying, unprecedented global monetary accommodation, a weaker than usual economic recovery and the recent price correction back to attractive value should be medium-term bullish for most precious metals prices.

B ackwardation in gold market indicates continued shortages.   Due to the quasi-currency status of gold, gold futures very rarely close in backwardation. However, on July 19, the August 2013 futures contract settled at US$1,292.9/oz. on the COMEX, US$0.40/oz. lower than the thinly traded July 2013 contract. The prior week, the cost of borrowing gold rose to its highest level since 2008, as the recent gold sell-off has substantially tightened the leasing market.

Silver is the wild card this week.  Silver was the only precious metal to decline last week, losing 1.2% to $19.4oz.  With a high correlation to gold, (0.80 monthly since 2008) silver and gold prices rarely diverge for long.   In early trading today, however, silver has moved higher, nearing the US$20/oz. – a key pivot point since the rally to $21oz. in spring of 2008. A sustained move above US$20oz could indicate the formation of a new bottom. [Silver ETFs Lead Metals Rally; Gold Climbs Above $1,300]

Platinum and palladium continue to outshine gold.  Palladium continued to be the best performing precious metal, gaining for the second consecutive week.  PGM (platinum group metal) prices have been supported as on-going labor issues in South Africa and continued expectations of lower Russian state stockpiles hurt supply estimates. At the same time, strong Chinese and US gasoline focused auto sales have increased demand for palladium.  In 2012, total global vehicle sales increased 5% to 80mn units despite a global GDP increase of only 3.5%. China auto sales have maintained strong momentum so far this year. Increasing per capita GDP, improving lifestyles and additional emissions regulation have contributed to increasing demand for the PGMs. On a 12-month basis, platinum and palladium prices have increased 0.5% and 28%, respectively compared to an 18% decline in gold.

Key events to watch this week. Manufacturing PMIs will dominate the news flow this week and provide investors a gauge for the strength of the global recovery. Given that Fed tapering is data-dependent, the flash Markit PMIs for US and China may attract as much attention as the official figures usually do. US housing market data will be closely analyzed to assess whether last week’s weak housing starts data was an aberration or the start of a trend.

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