Has the commodities market peaked? Last week saw a dramatic sell-off. Throw in the imminent flotation of Glencore and the possible listing later this year of UK-based exchange-traded commodities (ETC) specialist ETF Securities, and there is surely cause for concern. If the insiders are selling, isn’t it time for the rest of us to get out?
We mustn’t be hasty. There are some sound reasons behind last week’s plunge. A couple of well-known hedge funds betting on commodities with borrowed money were forced to cut back, and the whole event was prompted by five successive hikes in margin requirements for silver trading at the CME, the world’s main commodities trading venue.
In other words, people betting on silver with borrowed money were forced to put down bigger deposits if they wanted to keep playing. Silver dived 27% over the week.
Silver exchange-traded funds (ETFs) and ETCs have made it easier for investors to access the second-most popular precious metal, but a steady rise in ETF/ETC holdings of silver had contributed to very tight demand/supply conditions. This helped drive the recent price spike, from $30 per troy ounce at year-end to nearly $50.
Last week holders of silver ETFs/ETCs sold around 50 million ounces of silver (worth around $2bn) from their earlier stockpile of 600 million ounces, taking a great deal of froth out of the market. But fund flows data from ETF Securities shows that, while investors also took money out of energy ETCs (oil fell 12% for the week), there was net buying of agricultural commodities and of broad raw materials index trackers. Other than in silver, then, investors haven’t panicked.
So what’s next? Keep an eye on one key metric: the gold price. Fully 70% of the commodities ETF/ETC market is represented by investments in this one metal. Given the continuing build-up of tensions in the sovereign debt markets (see page 6 for the latest on Europe, for example), it seems a fair bet that investors’ demand for gold will continue for a while yet. We also haven’t seen the kind of broad-based retail investor buying frenzy that typically marks the end of a major bull market. Until we see this kind of investor activity, it’s too early to call a top in commodities prices.
• Paul Amery edits www.indexuniverse.eu.
• Disclosure: The writer owns the ETF Securities Physical Gold and Physical Silver ETCs.