PRECIOUS PREDICTOR ETFs can be used to track and predict broader industry changes and developments, particularly in the gold, platinum, palladium and rhodium industries
Photo by: Johnson Matthey
Precious metals exchange-traded funds (ETFs) have evolved substantially from being the new kids on the metals investment scene. ETFs now act as a market barometer for underlying investor demand and a potential window into future metal demand and prices, says banking group Standard Bank Corporate & Investment Banking Wealth head Johann Erasmus.
He adds that, while, historically, precious metals were considered a relatively opaque commodity sector, the advent of ETFs has provided a viewable indicator of underlying price and volume demand.
“ETFs are used to track and predict broader industry changes and developments, particularly in the gold, platinum, palladium and rhodium industries. Using ETFs as a barometer to better understand, for example, the platinum group metals (PGMs) sector has worked extremely well,” Erasmus states.
He notes that, currently, the US dollar prices of gold, platinum, palladium and rhodium are rising and, as expected, trading volumes of gold, platinum and rhodium ETFs are slowly increasing in line with the price increases, as investors become more active in executing their views for the underlying metals future price movements.
Erasmus comments that the volume movement of gold ETFs mirrors the yellow metal’s traditional status as a “safe haven”. He says that, “unsurprisingly”, current high pricings and strong growth of gold ETFs correctly reflect both the insecurity and unpredictability gripping developed markets in the wake of US President Donald Trump’s election and the UK’s exit from the European Union.
However, Erasmus points out that palladium is the outlier, as, despite the US dollar palladium price being near two-year highs, the mass sell-off of palladium ETFs by investors is bucking the trend. He notes that, initially, South African institutional investors sold some holdings in the last quarter of 2016, which was repeated a couple of months later by European institutional investors’ sell-off of palladium ETFs early in 2017.
Erasmus remarks that “unanswered questions abound”, as, while the high prices of palladium in rand, pound and euro terms could account for some of the sell-off, when one considers that the volume of ETFs sold by institutional investors accounted for almost half the total volume of palladium ounces held in ETFs, profit taking might not be the only explanation.
He says that an alternative explanation for the broad sell-off of palladium ETFs by South African institutional investors could be attributed to institutional investors diverting some funds into general commodities, which are currently perceived as good value in a rising market.
Nonetheless, Erasmus notes that this does not explain why European institutional investors would do the same just three months later. “Dollar palladium values are increasing and any adjustment in US interest rates makes US equities a more attractive bet.”
Further, he says, the demand for palladium is expected to increase, should the US economy enter a period of strong growth. He cautions that, currently, it may not be the right time to be unloading palladium ETFs in large volumes.
Additionally, Erasmus points out that, since the autocatalytic industry can substitute rhodium for some palladium, sustained higher palladium prices have, to some extent, seen a slight uptick in rhodium prices and a small shift to rhodium ETFs. However, he stresses that this, too, does not explain the “huge” sell-off of palladium ETFs.
“The fact that this anomaly is so puzzling reflects the extent to which analysts view ETF pricing and volume movements as the bellwether of broader industry trends, particularly among PGMs,” says Erasmus, who expects to see the explanation for palladium’s outlier status over the short term.
Moreover, the efficacy of PGM and gold ETFs in predicting and explaining broader industry and economic trends aside, he highlights, ETFs remain one of the best, and safest, vehicles for investors to participate in in the PGMs and gold markets without the risk, expense, time costs and legal hurdles of holding and trading the physical metals.