Physical gold ETPs see largest inflows in 17 months

Investors bought ETFS Physical gold ETPs at the highest pace in 17 months as geopolitical risks continued to rise and Argentina approached sovereign default again. The European Union and US have increased sanctions on the Russian economy reflecting the growing animosity between the world’s super-powers. That has led to growing demand for haven assets. Standard and Poor’s, the rating agency, declared Argentina in default after it had missed a deadline for paying interest on $13 billion of restructured bonds, which my lead to further demand for defensive assets. The US posted a strong economic recovery in Q2 2014, growing 4.0% year-on-year after the weather disrupted Q1 2014 growth. Stronger US growth combined with a rebound in Chinese data and more decisive monetary stimulus in the euro area should continue to be supportive of commodity prices – metals in particular – in the coming months.

Physical gold ETPs saw their highest inflows since March 2013. After such a long stretch of equity market outperformance, many investors appear to be protecting themselves against rising geopolitical risk by adding perceived defensive assets such as gold to their portfolios. Last week when the gold price fell 0.6%, investors used the opportunity to add to allocations, with US$106.4mn flowing into physical gold ETPs (US$109.6mn into all long gold ETPs).

Bargain hunting continues to attract investors to wheat. ETFS Wheat (WEAT) and ETFS Leveraged Wheat (LWEA) respectively received their 11th and 12th consecutive week of inflows. Wheat prices fell to their lowest level since 2009 about two weeks ago. Since then, a modest uptick in prices has continued to drive flows in wheat ETPs. The USDA’s crop progress report shows that the harvest is progressing well in the US, but there have been relatively few upside production forecast changes in recent weeks, adding to price stability. WEAT received US$4.7mn of inflows while LWEA received US$2.8mn last week.

ETFS Corn (CORN) saw highest inflows since March 2014. With prices having fallen to their lowest since 2010, inflows into CORN increased to US$3.7mn, marking three consecutive weeks of inflows. While the USDA crop report indicates continued improvement to yield and excellent progress in crop development, many investors feel that prices are now closer to a trough.

Long natural gas ETPs received US$5.8mn last week, marking the strongest monthly flows since November 2013. As prices slipped 0.2% last week (13.8% over the month), investors built positions. Although natural gas usage in electricity production usually increases in the summer months due to higher demand for air conditioning, relatively mild weather in many states has led to lower demand for natural gas this season compared to normal. However, abrupt weather changes could reverse this trend and with gas storage levels significantly below normal, many investors are positioned for a snap-back in prices.

Investors took profit on ETFS Daily Leveraged Coffee (LCFE), redeeming US$4.2mn, after prices rallied 9.4% in a week. Reports of colder and rainier weather in Brazil, which produces 45% of the world’s Arabica coffee crop led to strong price gains. Excess rain has the potential to stall the harvest which is underway and the cold could lead to frost damage. However the forecast is for drier and warmer weather now, prompting the profit taking.

Key events to watch this week. Policy meetings at the Reserve Bank of Australia and Bank of England will likely be the focal point of market attention, while the evolving conflicts in Ukraine and Gaza and the debt crisis in Argentina will also captivate the investor interest.