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In the third quarter (Q3) of 2013, total assets in commodity-linked exchange-traded products (ETPs) rose $8.4 billion to $135.9 billion, marking the first quarterly rise since Q3 2012, according to ETF Securities, a leading London-based provider of commodity ETPs.
The rise was driven by a combination of price increases and the largest quarterly inflows into non-gold commodity ETPs since Q1 2012.
In terms of flows over the quarter, commodity ETPs excluding gold saw $1.9 billion of inflows, more than compensating for the outflows in Q2, and the largest quarterly inflows since Q1 2012. Including gold, global commodity ETPs saw $2.3 billion of outflows in Q3 2013.
During the quarter, gold ETPs continued to see outflows. However, outflows moderated substantially compared to the record outflows seen in Q2 2013, with outflows slowing to $4.2 billion compared to record outflows of $19.6 billion in Q2 2013. On a monthly basis, gold outflows have been moderating at a relatively steady pace since peaking at $8.7 billion in April 2013.
Diversified broad commodity ETPs saw the largest inflows in Q3, with $779 million of net inflows during the quarter, the biggest increase since Q3 2012. Continued steady improvement in the US manufacturing sector, increasing confidence that China will maintain healthy economic growth and tentative signs of improving growth in Europe and Japan, together with perceived attractive prices and ample global liquidity are likely to be the main factors drawing asset allocators back to commodities.
Silver ETPs saw the next largest inflows in Q3 2013, with $706 million of net inflows over the quarter. After seeing a more than 50% decline in the silver price from its peak, it appears that investors view silver as one of the better value ways to gain exposure to the turn in the global industrial cycle. As around 50% of silver demand is from industry, the silver price has historically had a relatively strong positive correlation with manufacturing lead indicators. Its hybrid nature as both an industrial metal and as a store of value “hard currency” like gold appeals to many investors who recognise we are experiencing a cyclical pick-up in growth, but remain concerned about growing developed country debt levels and continued risks of currency debasement stemming from extraordinarily easy monetary policies.
Energy ETPs saw the third largest inflows over the quarter, with natural gas ETPs seeing $284 million of net new flows and oil seeing $66 million of inflows. A good part of the inflows into oil are likely to have been by investors looking to hedge against further supply disruptions in the Middle East and by momentum players chasing the WTI (West Texas Intermediate) oil price higher as inventories declined. Investors in natural gas ETPs tend to trade a range, and with the US Henry Hub natural gas spot price dropping from above $4.5MBtu (million British Thermal Unit) to below $3.5MBtu between May and early August, many investors viewed Q3 prices as a good entry point.
Agriculture ETPs received $121 million of new inflows, with inflows dispersed across the sector. The inflows reversed the negative trend of Q2 and indicate highly specific views within the sector. The single agricultural commodity with the largest inflows was coffee, with $70 million of inflows. This was followed by diversified which received $22 million of inflows and then cocoa and wheat with $14 million and $13 million of inflows respectively. Sharp price declines across most agricultural commodities and highly negative speculative futures positioning appears to have attracted investors willing to wait for price normalization.
Platinum ETPs also saw strong inflows, with $172 million of net new buying during the quarter. With the platinum price below estimated all-in costs of production, investors have been attracted to platinum as a relatively low cost way to play the improving outlook for the global economy. Supply has been constrained by labour problems at mines in South Africa where around 70% of global production takes place. At the same time, expectations of improved China platinum jewellery demand and some early signs of life in the core European economies and expected diesel autocatalyst demand has increased expectations of large supply shortfalls this year and next.
Industrial metal ETPs as a group saw outflows of $195 million in Q3 2013. The trend is surprising at first glance given the general improved outlook for the China and global industrial growth. The most likely explanation for the trend is that despite the improving demand outlook, the expected increased supply of a few key industrial metals, particularly copper has kept investors away. Therefore it appears that in Q3 investors chose to play the rebound of the industrial cycle through platinum, silver, oil and broad commodities rather than industrial metals.
Commenting on the flows, Nicholas Brooks, Head of research and investment strategy at ETF Securities, said: “The rise in investors’ allocations to commodities reflects a general improvement in investor sentiment towards the asset class as the global industrial cycle has picked up, confidence in China’s growth prospects have improved and the prices of a number of key commodities have dropped to perceived attractive accumulation levels. Assuming the global manufacturing revival continues, and US and European political issues do not derail the general improvement in the global economic outlook, we believe that Q3 2013 potentially marks an important positive turning point for commodities.”