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PRESS ROOM

Outlook 2018: Disruption driving rare metal appetite in 2018 - but mainstream commodities likely to stay flat

Tuesday 05th December '17

 

London, 5th December 2017: The disruptive rise of self-driving cars and automation technology are likely to drive demand for lithium and cobalt, but mainstream commodities could perform less impressively in 2018, according to ETF Securities, one of the world’s leading, independent providers of Exchange Traded Products (ETPs).

ETF Securities annual outlook foresees gold to be broadly flat over 2018, and the US/OPEC war of attrition to limit upside for oil. But expectations are higher for commodities impacted by the global move towards automation and self-driving cars.

James Butterfill, Head of Research and Investment Strategy at ETF Securities says:

“Global bond yields are hovering near the lowest levels in history but we would characterise this a bond balloon, not a bond bubble. The critical difference is what happens at the end: central bankers are keen to deflate the balloon, rather than burst the bubble.”

“Commodity sectors tends to follow structural shifts in technology and growth: agriculture made up the bulk of the commodity market in the 18th century, steel and coal during the subsequent industrial revolution, and oil and petroleum reigned supreme in the last century. We now stand at a tipping point for a new generation of commodities driven by intertwining technologies among the themes of energy efficiency, automation, and climate change, which are likely to be central for demand.”

Affected commodities include lithium and cobalt – both essential for battery production. Cobalt and lithium have already experienced price rises in 2017.

Outlook December

The Outlook suggests an overlooked impact from a rise in utility of automated vehicles is increased metal demand. Copper, silver, and gold are used in countless electronics and electrical components for these vehicles. As future vehicle fleets become more technologically dependent and autonomous, a corresponding increase of conductors across aggregate systems may follow.

ETF Securities also expects the automation revolution to drive appetite for rare earth elements like yttrium and praseodymium, which have become integral to modern technologies.

James Butterfill adds: “Perhaps the most interesting of this new generation of commodities is the least familiar, the rare earth elements. Despite their unfamiliarity to most, this group has become integral to produce modern technologies across many industries including medicine, defence, transportation, and energy generation as well as linchpins of our daily lives such as electronics and mobile devices. With a growing global middle class coupled with the rise of automation, a litany of materials you’d be hard pressed to pronounce, like yttrium and praseodymium, will continue to cement their central role in our modern standards of living.”

Precious metal outlook

ETF Securities expects little change in gold prices over the coming year with outperformance dependent on unforeseeable political risk off events which historically have driven appetite for gold, and the number of Fed rate rises, as rising rates are associated with weaker gold performance.

Nitesh Shah: Director, Commodities Strategy says: 

“Higher nominal interest rates, a steeper yield curve and the resultant stronger USD are likely to be impediments for significant upside in the price of gold. We expect the Fed to continue to tighten policy but we think the downside risks to gold prices are limited because real interest rates will remain depressed as inflation gains pace in the US. On balance we see little change in gold prices in the coming year.”

However, ETF Securities believes silver is below fair value and is likely to perform well, supported by industrial demand from solar panel and vehicle manufacturers.

Palladium has rallied 43%* in 2017 and was the strongest performing commodity, surpassing platinum for the first time in 16 years. But it is ETF Securities expectation that palladium’s outperformance will not be sustained in 2018, nor can platinum’s current 28%* discount to gold, in part as jewellery consumers to switch to the relatively cheap platinum. 

ETF Securities base case is that oil’s performance will also be unspectacular as the US/OPEC standoff will fail to prevent significant reductions in supply and the current glut will continue.

Nitesh Shah: Director, Commodities Strategy 

“OPECs strategy for forcing US production out of business has failed: In 2018, US production is expected to reach record levels, surpassing the cycle peak reached before the price war in 2014 and above the 10 million barrel mark last hit in 1970. There is little indication that the backwardation in futures curves is going to stop US production from expanding, and OPEC’s compliance programme will continue to fail.”

In currencies ETF Securities expectation is that flat global yield curves could pave the way for broad US Dollar strength as the US Federal Reserve accelerates monetary policy tapering.

The European Central Bank’s (ECB’s) cautious outlook for inflation will continue to apply downward pressure to the euro. We expect that Sterling will remain range bound in the near term, but has potential to break to the upside if uncertainty surrounding Brexit negotiations is positively resolved.

ETF Securities’ Outlook also sets out:

  • Why traditional commodity models imply current Bitcoin prices may be correct
  • How a contrarian approach to commodities investment has paid off since 2010.

 

Download ETF Securities Outlook 2018 (.pdf)
 

Please contact a member of the Press Office if you would like to make a booking:pr@etfsecurities.com/ tel: +44 (0)20 7448 4330. ETF Securities has a Globelynx system for broadcast interviews.