ETC: ETFS Commodity ETP Weekly

Global gold ETP holdings extended last week’s record highs as a lack of progress at the Eurogroup meeting stoked investor fears that Greece will fail to receive its next disbursement of aid by the end of the month. Despite some signs of a break in the deadlock in the Troika’s negotiations, many details still need to be ironed out, leaving Greece at risk of running short of the funds it requires. With the Thanksgiving holiday last week, little progress had been made on US fiscal policy discussions. Investors continue to be concerned that the US will not be able to avoid falling off the “fiscal cliff” of automatic tax increases and spending cuts at year’s end. Demand for safe haven assets such as gold is likely to remain strong as investors look to hedge potential worst case scenarios.

Gold ETCs saw US$65m of inflows after the Eurogroup meeting failed to extend the latest tranche of bailout funds to Greece. Although toward the end of the week there were signs that the IMF had dropped its insistence that Greece must meet a debt-to-GDP ratio of 120% by 2020 (the main point of friction between the Troika), flows into gold ETPs remained strong throughout the week. Even under the latest plans, Greece still needs EUR10bn to cover borrowing costs and its creditors have not agreed whether this will be paid for by extending maturities on Greek loans, reducing interest rates on bilateral loans or returning profits from the ECB’s holdings of Greek bonds.

Central banks accumulate over 40 tonnes of gold. Supporting the strong demand for physical gold, emerging market central banks had been extremely active buying gold in October according to IMF data. Brazil and Kazakhstan were some of the largest buyers, purchasing 17.2 and 7.5 tonnes respectively. Brazil has raised its gold holdings to the highest level in more than 11 years. Emerging market central banks have become increasingly keen to diversify their assets and this trend is likely to continue with the economic and political major reserve currency countries.

Long oil ETCs see US$15m of inflows driven by the continued unrest in the Middle East. Oil prices gained last week following the escalation of the conflict between Israel and the Hamas. The conflict comes at a critical time for Israel, ahead of upcoming elections, which are scheduled for late January 2013. While the recent ceasefire agreement has weighed on oil prices, the modest moves reflect the market uncertainty about a lasting truce and further antagonism by either side will keep investors on edge. The key threat is the contagion and potential destabilisation in major oil producing countries in the region which risks a renewed upside price move.

Silver ETCs see US$5.6m of inflows as the outlook for silver improves . According to the Silver Institute’s latest report, industrial demand for silver is expected to rebound in 2013 by 7% after losing ground in 2012. The electronics industry is expected to be the mainstay of industrial demand over the next two years, with growth in emerging Asia the predominant force. Silver has been the best performing precious metal in 2012, with prices have rising by 20% ytd. At the same time, stocks in COMEX warehouses have risen by 21%, an indication that industrial demand remains soft in 2012.

Key events to watch this week: Euro-area finance ministers and US politicians. The next Eurogroup meeting to discuss the fate of Greece’s finances this week is likely to be the main distraction for investors, along with any news flow coming from senior Democrats and Republicans on the progress toward a potential resolution of the US ‘fiscal cliff’ issue.