Metal-Backed Funds Hottest Since 2009 as Markets Tighten

JOHANNESBURG (Capital Markets in Africa) – Investors are warming to industrial-metal funds to take advantage of the biggest annual price rally in seven years.

Some $320 million poured into long-only exchange-traded funds this year through Dec. 9, poised for the biggest inflow since 2009, according to data compiled by Bloomberg Intelligence. Money is returning as the demand outlook improves, prompting Bank of America Merrill Lynch to raise price forecasts for copper, lead and zinc, while Citigroup Inc. said there’s “cautious optimism” on prospects for further gains.

Until earlier this year, metals hadn’t been easy to love. An index of industrial metals sustained three annual losses amid supply gluts, prompting about $180 million of net ETF withdrawals in 2015, the most since they were created less than a decade ago. The sentiment has turned as China’s economy stabilizes andDonald Trump’s transition team signals the new U.S. administration may spend as much as $1 trillion on infrastructure.

“The outlook is more positive for industrial metals,” George Gero, a New York-based managing director at RBC Wealth Management, said in a telephone interview. “Wherever you need building materials, you will need industrial metals.”

The Bloomberg Industrial Metals Sub-index has climbed 27 percent this year, on pace for the steepest annual advance 2009. Zinc has led the rally, up 72 percent amid production deficits that BI analysts see persisting through 2018. In the same time, copper has advanced 23 percent, nickel 30 percent and aluminum 16 percent.

There are still uncertainties surrounding the implementation of Trump’s spending plans and mooted tax cuts. While Senate Majority Leader Mitch McConnell warned that he considers current levels of U.S. debt “dangerous,” he said he’s looking forward to seeing the details of Trump’s infrastructure plan. “What I hope we will clearly avoid, and I’m confident we will, is a trillion-dollar stimulus,” he said at a news conference Monday.

While the improvement in China’s economic performance in the second half of this year justifies a price recovery for metals, the gains seen after the U.S. elections are exaggerated, said Dane Davis, an analyst at Barclays Plc in New York.

“It’s not at all clear what the outcome of Trump policies are going to be,” Davis said in a telephone interview. “We don’t know what the stimulus is going to be like, the actual price tag. In 2017, we think there will be a gradual pullback in prices.”

So far the bulls — some newly converted — have the upper hand. Goldman Sachs Group Inc. forecasts copper will rise to $6,200 in the next six months, compared with $5,766 at 7:32 a.m. in New York Tuesday and its previous prediction of $4,800. The market will see a shortfall of 180,000 tons next year, according to analysts including Max Layton and Jeff Currie, reversing from a previous forecast for a 360,000-ton surplus.

Goldman joins other banks such as Citigroup in projecting a more positive outlook next year. The copper market is “quite clearly tightening,” Citigroup analyst David Wilson said in a video presentation received Monday. “We’re seeing good growth from the China energy sector in particular, which will continue to support demand at similar or maybe slightly lower levels than this year.”

In other ETFs:

• Investors poured $25.5 billion in ETFs backed by precious metals, poised for the biggest inflow since their inception in 2001
• In energy ETFs, almost $1.55 billion was withdrawn so far this month, almost wiping out this year’s inflows
• Agriculture ETFs are poised for a second monthly outflow