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Commodity exchange-traded products (ETPs) saw record outflows in the second quarter (Q2) of 2013, according to data from ETF Securities, a London-based provider of exchange-traded funds.
Rising real interest rates in the US on expectations of an early end to Federal Reserve bond buying and a strengthening of the US dollar were behind the downturn in sentiment towards the asset class.
The combination of a sharp gold price decline and large outflows from gold ETPs caused commodity ETP assets to drop $49bn to $127bn, the lowest level since Q2 2010.
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 assets under management (AUM).
Gold ETPs saw $18.5bn of net outflows, the largest quarterly outflows from gold ETPs since the first gold ETP was created in 2003. Rising real interest rates in the US on improving growth prospects and expectations of a scaling back of the Fed’s quantitative easing bond-buying programme together with a strengthening US dollar caused the gold price to fall 21% over the quarter.
The peak of gold ETP selling was in April, when $8.7bn flowed out of gold ETPs. In May and June outflows moderated to $6bn and $3.9bn respectively.
Platinum was the one bright spot during the quarter with $712m of net inflows. Already tight supply-demand 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 auto catalysts ends up – spiked as domestic liquidity conditions tightened.
Copper ETPs saw mixed flows with outflows in April reversing to rise a total of $67m in May and June 2013 on fears accidents at US and Indonesian mines would hurt global supply. Zinc also saw investor interest, with $13m of net inflows during the quarter.
Agriculture ETPs saw net outflows of $108m during the quarter, reversing most of the inflows from Q1 2013. 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 on rising tensions in the Middle East with oil ETPs seeing $170m of outflows in the quarter, down from $848m during Q1 2013. Inflows into natural gas ETPs in June 2013 reversed most of the outflows from April 2013 and May 2013 as investors viewed the decline in the Henry Hub price as a buying opportunity.
Nicholas Brooks, Head of Research and Investment strategy at ETF Securities, said: “The moderation may indicate that the worst of the gold ETP selling is now behind us. One bright spot was platinum which saw $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.”