Maxwell Gold

Director Investment Strategy

Investment Insights

January 2017

The growing case for commodities

Summary

0.6

Rising inflationary pressures may provide tailwind for

commodities which historically closely track inflation.
Recovery in global growth may also spur commodity demand
driven by emerging markets and infrastructure spending.

Commodities: a key alternative

investment for a challenging landscape
A key contribution from holding commodities within portfolios
stems from its diversification benefits. Historically, broad
commodities have exhibited a low correlation to equities (both US
and global) as well as fixed income (see Exhibit 1).
Exhibit 1: Diversification benefits of commodities.
MSCI World

Barclays Aggregate

0.4
0.3
0.2
0.1
0

-0.1
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

Last year was certainly a turning point for the broad commodity
complex, with the Bloomberg Commodity Index posting its first
positive calendar year total return (+11.8%) since 2010. Prior to
2016, many investors approached commodities with disinterest and
scepticism. While investor attention has been brought back to
commodities amid price stabilization and improving fundamentals,
the asset class should not be overlook as a critical component for
portfolios heading in the year ahead with continuing changes to the
investment landscape and geopolitical realm.

S&P 500

Bloomberg Commodity Index - Average pairwise sector correlations

0.5

Trailing 1 Year Correlation

Source: ETF Securities, Bloomberg.. Chart data from 01/03/92 to 12/31/1 6.

Historically, the correlation between commodities themselves has

remained relatively low. In fact when evaluating the 5 major sectors
of the Bloomberg Commodity Index, the average correlation of each
sector pair has ranged from negative to about 0.5 at the peak
during the 2008 financial crisis (see Exhibit 2). Amid the recent
recovery in the commodity complex, this average pairwise
correlation has dropped significantly (0.1) making now in our view
a prudent time to look to commodities to help diversify. Many
contest this lack of homogeneity among different commodities
precludes its asset class status. This low correlation between other
asset classes and among its constituents, however, only amplifies
its unique position as a true asset class among other options.

Inflation may spur commodity prices

Commodities

Another key benefit from commodities comes from its sensitivity

and strong positive correlation to inflation, which is more pertinent
for 2017 as rising inflation is expected to continue (see Exhibit 3).

Livestock
Precious Metals
Energy

Exhibit 3: Headline inflation catches up to core inflation.

0.1
0.2
0.3
Correlation

0.4

0.5

0.6

Source: Bloomberg, ETF Securities. Commodities = Bloomberg Commodity Index and respective
su b-indices. Exhibit data from 01/31/91 1 2/31/1 6. See disclosures for further details.

This low correlation stems from the fact that commodities are
global assets driven primarily by varying fundamentals (supply and
demand), geopolitics, and weather patterns. These distinct drivers
lead to unique exposures beyond the key factors of financial assets
like stocks and bonds. This is particularly relevant as both these
asset classes remain richly valued and approach record levels.

2016

0.0

2015

-0.1

2014

-0.2

US Headline Consumer Price Index (CPI)

US Core Consumer Price Index (CPI)
US Producer Price Index (PPI) Final Demand

5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
(0.5)
(1.0)
(1.5)
(2.0)
(2.5)

2013

Base Metals

2012

Agriculture

2011

Exhibit 2: Commodity sectors historically exhibit low

correlations amongst each other.

2010

Amid heightened geopolitical uncertainty and stretched

valuations in traditional assets, commodities may serve as a
key alternative investment and source of diversification.

Per cent (%)

Source: Bloomberg, ETF Securities . Chart data from 12/31/1 0 to 12/31/16

1
Past performance is no guarantee of future results.

Precious Metals Outlook: Gold

Looking beyond the US, the global economic environment appears

to continue its recovery. Growth as measured by gross domestic
product will likely remain at depressed levels for developed
countries compared to pre-crisis levels, while emerging markets
will likely remain the global growth engine.
Exhibit 3: Manufacturing and raw material shipping
appear to have shifted course last year
Baltic Dry Index (lhs)

Global Manufacturing PMI (rhs)

1600

53.5

1400

53
52.5
52

1000

51.5

800

51

600

50.5
50

400

Index lev el

Index lev el

1200

49.5

200

49

0
Sep-16

Dec-16

Jun-16

Mar-16

Dec-15

Sep-15

Jun-15

Mar-15

Sep-14

Dec-14

Jun-14

Mar-14

$1,350
$1,250

$1,200
$1,150
$1,100

$1,050
Jan-17

Jul-16

$1,000

Golds strength in 2016 (posting an 8.6% gain after a 3 year bear

market) was overshadowed by the drawdown in Q4 last year
leading up to the Fed rate hike in December. A lot of the fast money
that entered the gold market amid 2016s volatility has likely left as
evidenced by a decrease in net speculative positioning in futures
markets and exchange traded fund (ETF) redemptions since the
election to levels witnessed pre-Brexit (see Exhibit 5). Further
geopolitical volatility and market surprises may spur investor
interest back into gold as a risk hedge.
In our view, precious metals should first and foremost serve the
role as a core risk management tool within portfolios. With an
outlook of heightened market volatility, rising inflationary
pressures, and growing policy uncertainty, precious metals are
likely to continue to see investment demand rise. Additionally in an
environment of lower expected returns and higher expected
volatility across all asset classes, investors will need to look beyond
the traditional means to achieve their investment objective.
Exhibit 5: Many speculators in gold have come and gone
2,100
2,000

300,000

Global Gold ETF Stock (lhs)

Net Speculative Positioning (rhs)

250,000

1,900
Metric tonnes

Source: ETF Securities, Bloomberg. Chart data from 11/1/1 4 to 12/31/1 6

As growth is anticipated to remain robust measures of global

manufacturing and shipping may continue to rise. Recent
manufacturing Purchasing Managers' Index (PMI) levels have risen
throughout 2016 indicating an increase of industrial activity and
production. Further the Baltic Dry Index, a measure of global
shipping of raw materials, has seen a similar recovery in recent
months (see Exhibit 3). This may point to further support of
commodities as global demand for raw materials and inputs
persists against higher industrial and economic activity.

Pr ice ($/ounce

$1,300

Source: Bloom berg, ETF Securities. Chart data from 01/01/15 to 01/20/17.

48.5

Dec-13

$1,400

200,000

1,800
1,700

150,000

1,600

100,000

1,500

50,000

1,400
0

1,300
1,200
Dec-14

Ma naged Money Gold Futures Contracts

Continued global economic recovery

may lead to higher commodity demand

US Real Interest Rates (lhs)

Jan-16

Commodities, a key input cost for industries and products,

historically move in tandem with inflation. A rise in both consumer
and producer prices may continue to benefit commodity demand
and add additional support prices globally.

Gold price (rhs)

1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0

Jul-15

Inflationary pressures will likely continue rising driven by

commodity prices and unwind from weak energy prices. Wage
growth acceleration also threatens to be a key driver of inflation in
2017, as the US jobs market continues to tighten. Additionally, a
renewed focus on fiscal policy and public infrastructure spending
under a Trump administration may also spur higher inflation.

Exhibit 4: Strong start to 2017 for gold and broader

precious metals complex

Jan-15

Over the last year, however, headline consumer inflation has risen
from 0.7% to 2.1% as of December 2016 along with producer
inflation. This brings headline inflation back in line with core
inflation which has hovered near the 2% the Federal Reserve (Fed)
target. We see a likely scenario where the Fed allows an overshoot
of this target as it awaits continued signs of economic recovery.

As highlighted in the November 2016 Investment Insights, The real

impact of rising rates on metals, a key driver for precious metals,
particularly gold, are real interest rates (see Exhibit 4). Rising
inflation, however, should keep real interest rates low even against
a Fed rate tightening cycle. This would be a tailwind for gold which
historically performs well when real US interest rates are negative
and low (up to 2%) as it is sought as a store of value by investors.

US 5 Year Real Rates (%)

Rising inflation has been a factor investors have not dealt with
since the onset of the financial crisis. Monetary stimulus from
central bank quantitative easing programs and the collapse of
commodity prices sparked sustained disinflation in the US and
deflationary pressures globally.

-50,000

Jun-15

Dec-15

Jun-16

Dec-16

Source: Bloom berg, ETF Securities. Chart data from 12/31/14 to 01/20/17.

2
Past performance is no guarantee of future results.

Important Information
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of
future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would
be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
The ETFS Silver Trust, ETFS Gold Trust, ETFS Platinum Trust, ETFS Palladium Trust and Precious Metals Basket Trust are not
investment companies registered under the Investment Company Act of 1940 or a commodity pool for purposes of the
Commodity Exchange Act. Shares of the Trusts are not subject to the same regulatory requirements as mutual funds. These
investments are not suitable for all investors. Trusts focusing on a single commodity generally experience greater volatility.
Commodities generally are volatile and are not suitable for all investors. Trusts focusing on a single commodity generally experience
greater volatility. Please refer to the prospectus for complete information regarding all risks associated with the Trusts. Shares in the Trusts are not
FDIC insured and may lose value and have no bank guarantee.
The value of the Shares relates directly to the value of the precious metal held by the Trust and fluctuations in the price could materially adversely
affect investment in the Shares. Several factors may affect the price of precious metals, including:

A change in economic conditions, such as a recession, can adversely affect the price of the precious metal held by the Trust. Some metals
are used in a wide range of industrial applications, and an economic downturn could have a negative impact on its demand and,
consequently, its price and the price of the Shares;
Investors expectations with respect to the rate of inflation;
Currency exchange rates;
interest rates;
Investment and trading activities of hedge funds and commodity funds; and
Global or regional political, economic or financial events and situations. Should there be an increase in the level of hedge activity of the
precious metal held by the trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the
price of the Shares. Should there be an increase in the level of hedge activity of the precious metal held by the Trusts or producing
companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares.

Also, should the speculative community take a negative view towards the precious metal held by the Trusts, it could cause a decline in prices,
negatively impacting the price of the shares. There is a risk that part or all of the Trusts physical precious metal could be lost, damaged or stolen.
Failure by the Custodian or Sub-Custodian to exercise due care in the safekeeping of the precious metal held by the Trusts could result in a loss to
the Trusts.
The Trusts will not insure its precious metals and shareholders cannot be assured that the custodian will maintain adequate insurance or any
insurance with respect to the precious metals held by the custodian on behalf of the Trust. Consequently, a loss may be suffered with respect to the
Trusts precious metal that is not covered by insurance.
Commodities generally are volatile and are not suitable for all investors.
Please refer to the prospectus for complete information regarding all risks associated with the Trust.
Investors buy and sell shares on a secondary market (i.e., not directly from Trusts). Only market makers or authorized
participants may trade directly with the Trusts, typically in blocks of 50k to 100k shares.
Definitions: Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index. Futures contract = agreement traded on an organized
exchange to buy or sell assets at a fixed price but to be delivered and paid for later. The US Consumer Price Index (CPI) is a measure that examines the
weighted average of prices of a basket of consumer goods and services. US Headline CPI includes all categories while US Core CPI excludes food and energy.
Global Manufacturing PMI Index (PMI) is an indicator of the economic health of the manufacturing sector. US Producer Price index (PPI) measures the
average change in selling prices received by domestic producers of goods and services. The Federal Reserve (Fed) is the central banking system of the United
States of America. The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost
to transport various raw materials. Brexit is an abbreviation for "British exit," which refers to the June 23, 2016, referendum whereby British citizens voted to
exit the European Union. Gross Domestic Product (GDP) is the total value of goods produced and services provided in a country during one year. S&P 500
Index is a capitalization-weighted index of 500 stocks selected by the Standard & Poors Index Committee designed to represent the performance of the
leading industries in the U.S. economy. Barclays US Aggregate (aka Barclays Aggregate) Bond Index is a broad-based flagship benchmark measuring
investment grade, US dollar, fixed-rate taxable bond market. The MSCI World Index is a free-float weighted equity index developed to track developed world
markets, and does not include emerging markets. Correlation is a measure of fluctuation between two variables. Pairwise correlation refers to the average
correlation between all combinations of two distinct variables among a set of variables.
Diversification does not eliminate the risk of experiencing investment losses.

Commodities generally are volatile and are not suitable for all investors. This material must be accompanied or preceded by
the prospectus. Carefully consider each Trusts investment objectives, risk factors, and fees and expenses before investing.
Please click here to view the prospectus.
ALPS Distributors, Inc. is the marketing agent for ETFS Silver Trust, ETFS Gold Trust, ETFS Platinum Trust, ETFS Palladium
Trust and ETFS Precious Metals Basket Trust.
Maxwell Gold is a registered representative of ALPS Distributors, Inc.
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