Investors Pile Into Gold And Cash In On Coffee

August 04, 2014

Gold exchange traded products had their strongest inflows last week since March last year on the back of geopolitical risks continued to rise and Argentina approached sovereign default again.  Coffee ETPs were also in the news as investors redeemed profits following a near 10 percent price rally.

Inflows into physical ETPs hit $106.4 (€80) million last week, according to data from ETF Securities.

Demand for so-called ‘safe haven’ assets, such as gold, increases during times of economic or political uncertainty, and according to a note from ETF Securities, “the European Union and U.S. have increased sanctions on the Russian economy reflecting the growing animosity between the world’s super-powers.”

Standard and Poor’s, the rating agency, also declared Argentina in default after it had missed a deadline for paying interest on $13 billion of restructured bonds, which could mean further demand for defensive assets.

“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 0.6percent, but investors used the opportunity to add to allocations,” said a note from Nicholas Brooks, head of research and Nitesh Shah, researcher at ETF Securities.

Coffee also saw its price rally 9.4 percent last week following reports of colder and rainier weather in Brazil, which produces 45 percent of the world’s Arabica coffee. Excess rain has the potential to stall the harvest which is underway and the cold could lead to frost damage, according to a note from ETF Securities.

However, the forecast is for drier and warmer weather now, prompting investors to redeem $4.2 million in profits on the ETFS Daily Leveraged Coffee (LCFE).

ETF Securities was recently in the news after it announced it had closed five exchange traded funds on energy, shipping and coal mining due to small amounts of assets and high operational costs.

However, commodity ETPs look like they are making a comeback this year following a lacklustre couple of years. The U.S. posted strong economic recovery in the second quarter of this year, amounting to 4.0 percent year-on-year, after the weather disrupted the first quarter’s growth. Combined with a rebound in Chinese data could help commodity prices.

“Stronger U.S. 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,” Brooks and Shah’s research read.


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