Niche experience and global reach enabled the UBS precious metals team to deliver in exceptional times, earning it top spots in the 2021 Energy Risk Commodity Rankings
Last year was a roller-coaster ride for precious metals, as geopolitical tensions at the start of the year were followed by the Covid-19 pandemic and ensuing economic crisis. This caused an array of unprecedented challenges for market participants, especially in gold markets.
The UBS precious metals team worked with many clients during this time to help them navigate pricing anomalies, gain access to investments, manage financial exposures, amend their hedging strategies or execute physical trades. The bank’s success over this period was reflected in the 2021 Energy Risk Commodity Rankings, where it dominated the precious metals categories.
In the Commodity Rankings, now in their 28th year, market participants vote for their preferred dealers and brokers in an array of categories that cover the commodities complex. This year, UBS continued to hold on to its first places in the gold, the silver and platinum, and palladium categories.
The precious metals team’s capabilities include investor services as well as offering broad flow and structured solutions to institutional and corporate clients. This diverse mix of clients gives the UBS team exceptional market insight, as well as an advantage when it comes to risk management capabilities.
Andrew Matthews, global head of precious metals distribution at UBS, believes the precious metals team benefited further last year from the bank’s decision to unify its global markets business at the start of 2020.
“Being able to access this global markets network enabled us to provide a consistent service to our customers all around the world,” says Matthews. “We pride ourselves on this collaboration. It allows niche specialists, such as our precious metals team, to be connected to a broader network of clients.”
It couldn’t have come at a better time for the team, just as it was dealing with an explosion of interest in gold, extreme volatility and regional price dislocations. At the very start of the pandemic, when national lockdowns began, there was an initial selloff in gold. Investor dashboards across the board went red, and gold was sold off in just the same way as other assets. However, by mid-March, its safe-haven appeal had kicked in and investors piled into exchange-traded funds, taking gold to all-time highs.
“Gold was really put on the map once again due to governments and central banks worldwide paring down interest rates and delivering huge stimulus packages,” notes Matthews. “It was interesting seeing the number of new customers coming into gold.”
However, with lockdowns preventing the movement of physical gold, extreme price dislocations opened up, particularly between the spot price in London and the futures price traded at the CME Group’s Comex metals exchange in New York. This led to a migration of volumes from futures to the over-the-counter (OTC) market via the exchange-for-physical (EFP) mechanism, says Matthews.
“Physical gold was particularly impacted by the huge disruption in the global supply chain in the initial onset of the pandemic,” he says. “This resulted in the EFP spread widening to about $80 per ounce in March, while the logistical breakdown in supply created high volatility in the marketplace. This created a pronounced migration of volumes among the UBS client base from the futures market to the OTC market, with volumes markedly still higher in the OTC channels for gold today.”
Keeping clients abreast of what was happening in the market during the tumultuous first few weeks of the pandemic was extremely important, says Bimbola Fawehinmi, head of precious metals options trading at UBS.
“This type of volatility isn’t the norm, so we made sure we kept in very close contact with our clients, keeping them informed about the changing market dynamic and the insights we had as a trading desk,” he says. “The futures versus OTC dislocation was something everyone had to navigate, and having a global presence certainly helped us do that. The UBS strategy and research team was heavily involved in this, with the trading desk also providing its own immediate perspective.”
Navigating unusual activity
In times of extreme price volatility, markets do not always act in a rational way, and there were several other pockets of unusual activity on which the UBS precious metals trading team kept a close eye. “The way the market was pricing volatility in the back end didn’t make much sense,” says Fawehinmi, by way of an example.
UBS was able to navigate this irrational behaviour through a combination of trader expertise and state-of-the-art technology. “Being a very strong foreign exchange house, we have excellent proprietary software systems that lend themselves very well to precious metals,” explains Fawehinmi.
The firm’s options pricing and analytics system, UBS T-Pricer, began life in the FX markets and has now been adapted and rolled out to precious metals. It is also being extended into other parts of the bank, including some of UBS’s interest rates and equity products.
Among other things, the system can flag up market dislocations and pricing anomalies, to which traders can then react using their expertise. “As an experienced trader, you do gain intuition into these things, but having technology to back up this intuition is very powerful,” says Fawehinmi, who has 18 years of trading experience.
He explained how he was able to look at the ways in which spot gold has historically moved after a sharp price movement, and use that to help inform a forecast of how it will move in the future. “I can also look at the value of volatility at various times and the behaviour of spot prices to see if what is happening now is typical and makes sense. All of these tools helped the team make trading decisions that helped navigate these difficult markets,” he adds.
Being involved in the physical side of the gold market at a time physical movement of the metal was constrained added another layer of challenge to the UBS precious metals desk, and involved a team far wider than just global traders, says Matthews. “Managing the complex ebbs and flows of the metal during this time required enormous dedication from our operations professionals and vault staff, and they certainly deserve credit for this,” he says.
When it comes to the outlook for gold, Matthews expects prices to pick up again once inflation begins to rise and as physical demand resumes. “Gold is caught in a range right now, and we’re waiting for its inflation hedge abilities to shine,” he says. “As economies recover, we expect strong physical demand to return into Asia, with China and India leading the charge,” he adds.
One factor likely to impact gold prices is the outlook for cryptocurrencies, says Fawehinmi. “I think, right now, things are looking quite constructive for gold,” he says. “Since January this year, it’s fallen, with people focusing on other things such as cryptocurrencies. We’re starting to see cryptocurrencies diminishing a bit as a store of wealth, and I think we’ll see more focus coming back to gold as a store of value.”
White metals on the move
While gold was the most dramatic story in the precious metals complex last year, there were some notable moves elsewhere. For example, the palladium market had been tight at the end of 2019 on the back of more stringent emissions standards, which called for the use of more palladium in automobiles. After reaching an all-time high in February 2020, the market plunged because of a downturn in the use of vehicles during lockdowns.
“Now that industrial growth is back on the agenda, white metals are becoming more interesting again,” says Matthews. “In the short-to-medium term, they should continue to benefit from the enormous economic stimulus packages being rolled out.”
Even though, in the longer term, the energy transition will bring about the demise of the combustion engine, there are wider industrial uses for the platinum group metals, including additional environmental applications, he adds.
Interest in trading silver is also growing. “In general, there has been a significant shift in investor types. With greater accessibility to trading platforms, silver, in particular, has experienced an increased amount of retail participation,” says Matthews. “This will continue to be a trend and will probably lead to increased volatility,” he adds.
Beyond precious metals, the stimulus-led rally in broader hard assets has driven strong appetite from UBS’s client base to trade the commodities spectrum, says Matthews. “UBS has a global commodities platform with a strong heritage within investor solutions,” he says. “This is driven by a market-leading offering of enhanced beta indexes such as the Constant Maturity Commodity Index, and a fully mature risk premia and systematic strategies offering.”
This range of investor services across the commodities complex, as well as UBS’s unified global markets network, provides the precious metals team with unique insights into the connections and correlations between commodities markets. It is this broad coverage, coupled with deep sector expertise, that allows the precious metals team to meet its clients’ diverse and changing needs, no matter how extreme the circumstances.