Commodity ETPs see record outflows as real US Interest rates rise
Commodity ETPs saw record outflows in Q2 2013, as real interest rates rose in the US on expectations of an early end to Fed bond buying, and a strengthening of the US dollar . …
ETF Securities Research
hit investor sentiment. The combination of a sharp gold price decline and large outflows from gold ETPs caused commodity ETP assets to drop US$49bn to US$127bn, the lowest level since Q2 2010. It is interesting to note, however, that gold ETP outflows peaked in April 2013, with outflows moderating in both May and June. The moderation may indicate that the worst of the gold ETP selling is now behind us. One bright spot was platinum which saw US$712m of inflows on the back of growing supply concerns. The outlook for most commodity flows and prices will likely turn on perceptions of whether the recent liquidity squeeze and growth scare in China is temporary or the start of a larger trend. Gold and silver will likely remain beholden to views on the Fed’s intentions and the direction of real interest rates. On both counts we believe investor reactions have been overdone.
Gold ETPs see record outflows
Commodity ETPs saw a record quarterly decline in assets under management in Q2 2013 on the back of a sharp decline in the gold price and large selling of gold ETPs by tactical and momentum investors. Total commodity ETP assets fell to US$127bn, down from US $186mn at the end of Q1 2013.
Price decline key driver of AUM drop
Two-thirds of the decline in commodity ETP assets in Q2 2103 was caused by price declines, with the remainder accounted for by outflows. The gold price decline alone accounted for 51% of the fall in total commodity ETP AUM. Total net outflows from all commodity ETPs during the quarter were US$19.6bn, with gold accounting for 94% of
Rising real interest rates hit gold
Gold ETPs saw US$18.5bn of net outflows, the largest quarterly outflows from gold ETPs since the first gold ETP was created in 2003. Gold ETP AUM also fell by the sharpest rate in its history, shedding US$48.9bn over the quarter. More than 60% of the fall in gold ETP AUM was driven by gold prices dropping by over a fifth. Rising real interest rates in the US on improving growth prospects and expectations of a reduction of Fed bond buying together with a trengthening US dollar was a key driver of the gold price decline.
Gold ETP selling peaked in April
Tactical and momentum investors sold ETPs into the price correction.
The peak of gold ETP selling was in April, when US$8.7bn flowed out of gold ETPs. In May and June outflows moderated to US$6bn and US$3.9bn respectively. Almost 90% of the selling in April came from North America¹. In May and June, just under 60% of gold ETP selling came from North America, a sign that the worst of the panic-selling may be over.
Platinum was the one bright spot during the quarter.
Platinum ETPs saw US$712mn of net inflows in Q2 2013. Tight supplydemand fundamentals, combined with growing concerns about future supply from South Africa on labour disputes and potential power shortages, caused investors to build positions despite the generally negative sentiment towards commodities. Palladium saw strong inflows in April and May. However, these reversed in June as concerns about China’s growth – where a large portion of the palladium used in gasoline autocatalysts ends up – spiked as domestic liquidity conditions tightened.
Copper ETPs gained traction in May and June
Copper ETPs saw US$67mn of inflows in May and June 2013 on fears accidents at US and Indonesian mines would hurt global supply.
Concerns over the pace of economic growth in China and fears of supply surplus before these accidents had led to outflows in April of US $137mn. Zinc also saw investor interest, with US$13mn of net inflows during the quarter.
Rising supply hits agriculture ETPs
Agriculture ETPs saw net outflows of US$108mn in Q2 2013, reversing most of the inflows from Q1 2013. However the outflows were less than a third of the outflows seen in the corresponding quarter of the previous year. Rising supply expectations for grains and soybeans after record planting in the US has led investors to pare back ETP holdings.
As we saw last year, severe drought conditions can quickly change these expectations, and flows into these products are likely to be sensitive to weather conditions over the course of the summer.
Outflows from oil ETPs eased
Tightening WTI oil supply conditions helped slow the outflows from oil ETPs to US$170mn in Q2 2013, down from US$848mn of outflows in Q1 2013. US oil inventories appeared to peak early in the quarter and provided a tail-wind for prices.
Sharp natural gas price decline attracts investors
Inflows into natural gas ETPs in June 2013 reversed most of the outflows from April 2013 and May 2013 as investors viewed the 11% decline in the Henry Hub price over the quarter as a buying opportunity.
Conclusions and outlook
Most of the decline in commodity ETP AUM was driven by the fall in the gold price. Investors sold into the price declines, exacerbating the decline in AUM. The rotation into more cyclical assets that started in Q1 2013 was curbed by fears the Fed’s tapering of bond-buying activity may occur too soon and derail the risk asset rebound. An additional factor that had particular influence on perceptions of the outlook for commodity demand was the tightening of short-term liquidity in China and fears that it might be part of a broader austerity move by the Chinese authorities. In our view, both the fall in gold price and investor selling of gold ETPs is overdone. We believe the recent sharp rise in real interest rates has been excessive given the macro environment and any unwind should help support the gold price and gold ETP flows. Fed members more recently have been trying to talk bond yields back down. However, they will need the help of weaker US data to see a sustained decline. Across the more cyclical metals, supply constraints for some are becoming more price-supportive, with platinum, palladium and copper seeing growing supply issues. If China’s growth fears turn out to be temporary, these metals will likely perform again and investor flows will likely follow. The current soft patch in agricultural ETP demand could turn very quickly if drought conditions we saw last year in the US return. Moreover, agriculture has a relatively low correlation with the business cycle, which may attract contrarian investors looking for uncorrelated assets.