Commodities continue to attract investor attention

Commodity ETPs saw their largest inflows in six weeks, with bargain-hunters attracted by depressed valuations. Several commodities including Brent, platinum, palladium and most industrial metals rose last week rebounding on the back of the better investor sentiment toward commodities. With many commodities trading so close to their marginal cost of production, we believe that prices cannot fall much lower without triggering a supply response. Better-than-expected GDP and industrial production data from China, the world’s largest consumer of commodities, also helped boost cyclical commodity prices.

Inflows into physical gold reach six week highs. There was US$22.6mn of inflows into physical gold last week as the price of the metal fell a further 0.4%. With gold trading just above our estimated marginal cost of production (US$1,100/lb), a natural floor to the metal appears to have been reached.

Bargain hunting drives US$12.3mn into long crude oil ETPs, a seven week high. After reaching a 5-year low the previous week, Brent oil, recovered 2.8% last week. WTI on the other hand continued to slip 0.7%. At bargain prices, ETP investors bought into crude, with US$5.1mn flowing into long Brent ETPs and US$7.2mn into long WTI ETPs. According to media reports (although not confirmed officially), Saudi Arabia cut supplies by 328,000 barrels a day in September to 9.36 million barrels a day. Ample supply has been weighing on prices and if confirmed, Saudi’s moves could help prices recover further.

ETFS Daily Leveraged Natural (LNGA) attracts US$9.mn as Henry Hub prices slide 4.6%. Natural gas prices fell as working gas in storage rose 94Bcf last week. Storage values however remain 9.0% below year-ago levels and 9.1% below the 5-year historical average. Natural gas is a commodity that is highly sensitive to changes in weather that experience sharp supply drawdowns and investors are betting on a price rebound ahead of winter peak demand.

ETFS Platinum Trust (PPLT) sees largest outflow since March on profit-taking. Platinum rose 1.5% last week driving a US$6.1mn redemption from PPLT. Anglo American Platinum (Amplats) disclosed that the five-month strike earlier this year had cost the company 424,000 ounces in lost production and it lost a further 108,000 ounces in the subsequent ramp-up. However, it also confirmed it has resumed production a month ahead of schedule, which could cap gains in the near-term.

An 11% decline in coffee prices led to profit-taking for ETFS Daily Short Coffee (SCFE). US$2.2mn was redeemed from SCFE, marking the highest outflow from the short coffee ETP since May. The violent price moves have polarised investors with US$1.6mn flowing into ETFS Daily Leveraged Coffee (LCFE) last week – the highest in six weeks. Drought and irregular rain in Brazil, the world’s top producer has hurt the prospect for the 2015 crop. However, with rains resuming, the flowering process has started for the 2015 crop, but analysts are divided in their opinion as to the extent the earlier disruptions will damage the crop.

Key events to watch this week. All eyes will be on the Federal Reserve’s policy meeting in which the central bank is expected to announce the end of its asset buying programme. Any extension of its programme could trigger a rally in gold prices as currency debasement fears linger for longer. Weighing on investors’ minds is the prospect of rate rises, which we expect to occur in H1 2015. Investors will listen for cues from the Fed on this front.