Physical base metal ETPs surge following QE3

Oct 4th, 2012 | By | Category: Commodities

Exchange-traded products (ETPs) benchmarked to base metals have soared since the US Federal Reserve (Fed) announced that is was extending its quantitative easing programme, so-called QE3.

Physical base metal ETPs surge following QE3

ETFS Nickel (NICK) surged 9.5% in the two weeks following the announcement of QE3. The product tracks the DJ-UBS Nickel Sub-Index and is listed on the London Stock Exchange.

One of the reasons behind the surge is that the Fed’s asset-purchase programme is unsterilised, meaning the Fed is essentially printing new money.

With new money being created at a faster rate than the rate of growth of the economy, there is more money chasing the same quantity of assets. This devalues the dollar, meaning hard assets such as base metals must rise in price to maintain their relative value in dollar terms.

There is also the potential consideration that the asset-purchase programme will stimulate economic growth, which in turn will increase demand for base metals. Either way, in this kind of environment, when money is being created, real, hard assets, such as base metals, are likely to do well.

Indeed, this has been reflected in performance figures released by ETF Securities, one of Europe’s leading providers of ETPs and a pioneer in Exchange Traded Commodities (ETCs), which reveal that seven out of the firm’s top ten performing products in the fortnight following the announcement of QE3 were benchmarked to base metals.

Products linked to nickel, lead and tin led the advance, gaining between 3% and 10% during the two-week period 13 to 27 September.

Scott Thompson, Co-Head of EMEA Sales at ETF Securities, said: “Co-ordinated or not, it seems likely that the world’s major central banks are planning further large liquidity injections in the months to come. A fortnight ago the Fed announced QE3, and last week Japan announced an increase in its asset-buying programme. The ECB is edging closer to potentially ‘unlimited’ buying of European sovereign debt and the Bank of England has also clearly signalled its readiness to step up easing efforts.

He continued: “In the short space of the time since this has become apparent, investors have responded accordingly, triggering substantial gains across certain commodities, particularly industrial base metals such as nickel, lead and tin.”

Thompson added that ETF Securities offers investors the flexibility to select the most appropriate metals ETP solution, whether it be backed by physical metal or indexed to futures contracts.

Top performing ETPs since announcement of QE3:
(13 September – 27 September)

ETFS Nickel (NICK)                                            9.5%
ETFS Physical Nickel                                        8.8%
ETFS Physical Lead (PHPB)                            6.9%
ETFS Forward Natural Gas (NGAF)                5.3%*
ETFS Lead (LEED)                                              5.2%
ETFS Long INR Short USD (LINR)                   4.7%**
ETFS Tin (TINM)                                                  4.4%
ETFS Natural Gas (NGAS)                                4.2%*
ETFS Physical Zinc (PHZN)                             3.1%
ETFS Physical Tin (PHSN)                               3.0%

(All the above products are listed on the London Stock Exchange)

* Natural Gas rallied on expectations that production cuts in the Gulf of Mexico as a result of damage caused by Hurricane Isaac will result in lower-than-normal gas supply. Approximately 5% of the region’s natural gas output remains offline, according to regulators.

** The ETFS Long INR Short USD, which tracks the MSFX Long Indian Rupee Index (TR), has been boosted by measures taken by the Indian government to increase competitiveness in the Indian economy and tackle the country’s bulging deficit.  Among the measures taken is the liberalisation of key industries, such as retail, aviation and broadcasting, to permit greater foreign direct investment. This is likely to lead to capital inflows into the country, providing a tailwind for the rupee.

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