U.S. fiscal cliff sets dilemma for ETP investors in November

* Energy futures ETPs attract $225 mln in net inflows

* Precious metals have mixed month

* Investors shun broad commodities ETPs

LONDON, Dec 7 (Reuters) - Conflicting signals from the U.S. "fiscal cliff" negotiations confused investors in commodities exchange traded products in November, some of whom hugged the safety of gold whilst others sought out riskier energy and base metals ETPs. The term "fiscal cliff" describes an increase in U.S. taxes and cuts in spending that will take effect in January if Congress cannot agree ways to cut the U.S. deficit. Investors worry that if implemented, the austerity measures could tip the United States back into recession. This would be negative for the more economically-sensitive commodities such as energy and industrial metals. Yet BlackRock data show energy ETPs attracting a solid $225 million in net inflows in November and industrial metals some $16 million, whilst safe haven precious metals attracted $1.713 billion. This mirrored wider investor indecision over ETPs, with Treasuries attracting some $2.7 billion, whilst riskier emerging market equities and bonds drew in around $6.2 billion, BlackRock said. Broad commodities ETPs experienced net outflows of $8.4 million, suggesting asset allocators were in "risk off" mode. "With the uncertainty regarding Europe and the fiscal cliff in the U.S., investors have been cautious with respect to allocations into this asset class," said Dodd Kittsley, global head of ETP research at BlackRock. ETPs, an an easy route into commodities for investors, include exchange-traded funds, exchange-traded commodities and exchange-traded notes. All trade on a stock exchange and their value is linked to the underlying assets. Ole Hansen, head of commodity strategy at Saxo Bank, identified uncertainty around the fiscal cliff negotiations as one of the key drivers for markets in November, along with the U.S. Presidential election and renewed worries about Greece. At times, there were "some knee-jerk reactions in both commodities and financial markets due to the confusing signals coming from the President and the Republican-led Congress," he said in a note. Guy Wolf, a macro strategist at Marex Spectron, added that market stress had prompted some unwinding of positions by hedge funds in November, with a flurry of investor redemptions. "In the old days, market stress resulted in high correlation," he said. "But now everything is already correlated so in times of market stress you get dispersion."

ENERGY BOOST Energy futures ETPs attracted investors on the back of improved economic data from China and the United States, the two biggest oil consumers in the world. Instability in the Middle East also boosted petroleum prices, resulting in a 1.97 percent gain for the S&P GSCI Energy index in November. But global energy equity ETPs had outflows of $400 million over the month. "With an opaque economic climate, the profitability of energy companies remains uncertain for many investors," Kittsley said. Industrial metals did well, with the S&P GSCI's sector index up 6.41 percent, partly due to optimistic demand expectations for 2013, notably from China, S&P said. Hansen agreed that rising hopes China had turned the corner were the main reason for investor interest, but added that Hurricane Sandy, which left thousands of U.S. homes without electricity for days, had triggered a rise in battery consumption, supporting lead. Gold and other precious metals had a mixed month, with silver ETPs registering $104 million in outflows, whilst gold drew $1.776 billion in net inflows. Hansen noted that gold had experienced a small crisis of investor confidence in late November after a sell-off where the price dropped by $25 an ounce in seconds. Wolf added that U.S. investors were selling their gold holdings to realise capital gains and avoid a possible rise in capital gains tax next year. "That's a significant factor in what's going on in gold right now," he said. Agriculture ETPs had another poor month, with some $116 million of outflows. S&P said that the sector's 1.96 percent decline in November was the biggest drag on overall S&P GSCI returns. It added that a slump in soybean prices was to blame, after a U.S. government report in early November showed a larger-than-expected domestic soybean crop, prompting some unwinding by hedge funds. At the end of November, BlackRock's data covered 910 commodity ETPs, worth some $205.9 billion.

Global commodities ETPs at end-November (US$ mln)

SECTOR FLOWS ASSETS UNDER MANAGEMENT Total 1,830 205,915 Broad/Diversified -8 19,671 Agriculture -116 6,484 Energy 225 9,348 Industrial Metals 16 2,639 Precious Metals 1,713 167,773

Source: BlackRock