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Political risk drives precious metal inflows

Precious metals inflows (US$126mn) continue for a second week on rising political uncertainty

Precious metals inflows (US$126mn) continue for a second week on rising political uncertainty. Gold (US$50mn) and Silver (US$73mn) ETPs had another strong week of inflows. The main catalyst has been the increasing political tension in the US, starting with President Trump’s dismissal of his FBI director and then culminating with congress appointing a special prosecutor to investigate possible Russian involvement in the US election. With some questioning whether the Trump administration can survive its full-term, safe haven assets such as bonds and precious metals rallied last week. Silver ETPs continue to see investor interest as the gold-silver price ratio still looks elevated relative to recent history. We continue to have a favourable view on silver fundamentals as production has fallen in recent years creating a supply deficit. Silver production, including mine production and scrap, fell 32.6 million ounces between 2015 and 2016.

Technology ETPs drive global equity inflows of US$30mn. The previous weekend saw an unprecedented global cyber-attack which impacted both public and private computer systems in up to 74 countries. On the back of this both the Cyber (US$13mn ) and Robo (US$16mn ) ETPs saw strong inflows last week. The Tech sector more generally continues to lead equity performance, as tech earnings in the US have come in better than expected. 82% of Tech companies have so far beat estimates, one of the strongest sectors in the S&P 500.

Dollar Buying and Euro Selling. The US Dollar index (DXY) has had its worst week in ten months as the political tumult in the US sent bond yields lower. Nevertheless, the USD ETP had inflows of US$8mn last week as investors took the opportunity to buy the US Dollar ahead of the June Federal Reserve Meeting in three weeks’ time. Currently the futures market is assigning nearly 100% probability to a hike at the meeting. The primary buying came against the Euro which broke the 1.10 EUR level following President Macron’s inauguration. Since April, there have been five straight weeks of inflows in the USD ETP since mid-April, totalling US$50mn.

Industrial metals reverse outflows from last week. There were US$21mn into the Industrial Metals basket ETP and US$11mn into the Copper ETP following China’s announcement last week that it would invest an additional US$20bn to the Silk Road Fund which seeks to boost infrastructure and trade links with the rest of the world. In contrast, the China A-share equity ETP saw US8mn of outflows as tighter liquidity conditions continues to drag on the A-share market which is down -1% YTD.

James Butterfull - Executive Direct0r, Head of Research and Strategy - ETF Securities