9th April 2014
Commodities moved back into favour in the first quarter of 2014, with commodity prices as measured by the DJ-UBS Commodity Index rising by 7%. Commodity Exchange traded products saw their first quarterly inflows after four consecutive quarters of outflows.
Total assets invested in commodity ETPs increased to US$122.4bn at the end of Q1 2014 from $122.1bn at the end of last year, with precious metals, agriculture and industrial metals seeing the bulk of the inflows.
Silver saw the largest inflows during quarter as investors looked to the metal as a leveraged play on improved sentiment towards gold.
Nicholas Brooks, Head of research and investment strategy at ETF Securities says: “After seeing selling in January, gold ETPs moved strongly back into favour in February and March as investors revised down their highly bullish US growth assumptions and revised up the global risk outlook. Broad commodity ETPs also saw a turn in sentiment, with asset allocators rotating into the asset class as an alternative to overstretched developed market equities.
“Platinum ETPs saw strong demand as an extended strike in South Africa raised supply concerns. Coffee and natural gas ETPs, on the other hand, saw aggressive profit-taking as prices of both commodities surged on weather-related supply issues. Oil ETPs also saw strong investor profit taking as the WTI oil price rallied on strong US demand for oil products early in the year.”
Key commodity ETP trends in 1Q 2014
Silver ETPs see largest inflows, with US$354mn of net purchases. Silver was one of the few commodity ETPs to see inflows in every month of the first quarter, following on strong inflows in 2013. It appears that investors view the silver price around the $20/oz level as a good entry point (less than half its 2011 peak) and with silver often viewed as a high beta version of gold, improved sentiment towards the gold price is causing investors to build positions in silver ETPs.
Gold ETPs see strong investor demand in February and March as global risk perceptions rise. Gold ETPs saw the strongest inflows of any other commodity ETP in February and March, with inflows of $322m and $536m respectively. Large outflows in January ($946m), however, meant that for the full quarter there were in fact $88mn of outflows. The strong positive turn in investor sentiment towards gold in February and March was driven by a number of factors. The first was a scaling back of investor bullishness on the growth outlook for the US economy following weak data releases. The second was an upward revision to global economic and political risk assessments following financial and political turmoil in a number of emerging markets. Finally, Russia’s take-over of the Crimea and continued concerns of a broader conflict in the Ukraine has caused investors to turn to gold as insurance against further negative political and economic surprises.
Platinum ETPs see strong demand as investors worry about South Africa supplies. An extended strike in South Africa, where over 70% of the world’s platinum supply is sourced, raised concerns of platinum shortages this year, pushing up the price and causing investors to increase allocations to the metal. With few signs of the strike being resolved any time soon, further price gains and inflows seem likely.
Broad commodity ETPs see strong inflows as asset allocators increase commodity allocations. Broad diversified commodity ETPs saw the strongest inflows after silver and gold ETPs in February and March, with net new flows of $324m and $186m respectively. These strong inflows were masked in the quarterly figures due to $683m of outflows in January, with quarterly flows down $173m. The strong rebound in investor interest in ETPs providing broad commodity exposure indicates a sentiment shift towards the asset class by global asset allocators. With most commodity prices at the end of 2013 well down on peak levels three years ago and developed market equity valuations starting to appear stretched, a number of investors appear to have been rotating into commodities over the past two months. With China having recently announced a new fiscal stimulus program and further easing likely on the way, the sentiment shift towards commodities has the potential to gather further momentum as long as the US economic recovery remains on track.
Agriculture sees strong investor interest as prices rebound. Agriculture ETPs saw a rebound in investor interest in 1Q 2014, with the sector seeing $217m of inflows. The largest inflows ($182m) were into broad diversified agriculture ETPs indicating that the bulk of buying was by asset allocators wishing to gain broad exposure to the sector rather than tactical single commodity bets. Of the individual agriculture commodities, corn saw the strongest investor interest, with $109m of inflows during the quarter.
Coffee ETPs see outflows as investors take profits as Arabica price surges. Following record inflows into coffee ETPs in 2013 as the Arabica coffee price fell close to a seven year low, investors sold $264m of their long coffee ETP holdings in February and March as the Arabica price surged 70%. Short coffee ETPs have recently started to see increased investor interest.
Natural gas ETPs see profit-taking as Henry Hub price rallies strongly on US cold weather. Natural gas ETPs tend to see range-trading behaviour and 1Q 2014 was no exception. After seeing inflows through much of 2H 2013 when the Henry Hub spot price was loitering around $3.5/MnBtu, as the price spiked up to a peak of $7.98/MnBtu in March 2014, investors took profits heavily, with $218m leaving natural gas ETPs in March alone. As with coffee, there has been increased interest in short natural gas ETPs recently. Oil ETPs saw large outflows in January 2014 as the WTI oil price surged on US cold weather and inventory drawdowns and investors took profits. However, as prices stabilised in February and March, investors moved to the sidelines and oil ETP flows levelled out.