November outflows confirm dismal year for commodity ETPs

Claire Milhench
Thursday, 5 Dec 2013 | 10:50 AM ET

* Commodity ETPs lose $2.1 billion in November

* $37.3 billion pulled from asset class in year-to-date

* Investors ditching gold in favour of equities

LONDON, Dec 5 (Reuters) - Investors continued to turn their backs on commodity exchange traded products (ETPs) in November with some $2.1 billion in global outflows, capping a dismal year for the gold-dominated asset class which has lost out to a rally in equities. Some $37.3 billion was pulled from commodity ETPs globally in the first 11 months of the year, according to data from BlackRock, the world's biggest asset manager. This puts commodity ETPs on course for one of their worst years on record. "It's been a tough year," said Nitesh Shah, a research analyst at ETF Securities, an issuer of ETPs. "There's been a change in mindset by a number of investors." This has been most evident in gold, with ETP holdings now down $36.4 billion for the year-to-date. ETPs, whose value is linked to moves in their underlying assets, are an easy route into commodities for investors and allow asset managers to make quick tactical shifts. Gold is the biggest single commodity in the ETP space by asset volume, so any change in sentiment for the metal acts as a drag on the whole asset class. "Gold ETPs saw outflows every month this year ... and assets declined by 48 percent," said Dodd Kittsley, global head of ETP research at BlackRock. "The absence of extreme crisis conditions in Europe or elsewhere served to diminish gold's allure in comparison to more mainstream investments." The biggest factor now weighing on gold is the likelihood that the U.S. Federal Reserve will reduce its asset purchase programme next year on the back of positive U.S. economic data, which is becoming harder to ignore. An early cut in quantitative easing could pave the way for higher interest rates, making other investments more attractive than gold, and could diminish the programme's potential to cause inflation, reducing gold's attraction as a store of value. "We've seen stronger payroll and manufacturing data, so investors are expecting the Fed's bond buying to be curtailed in 2014," Shah said. Investor demand for gold has also diminished following higher volatility this year, including sharp sell-offs in April and June. "Investors have tended to view gold as a very safe asset and the violent moves that gold experienced this year have prompted some to step back," Shah said.

LEFT IN THE DUST This year commodities have been left in the dust by rallying stock markets, with developed market equity ETPs attracting flows of $227.9 billion in the first 11 months, BlackRock said. "A backdrop of subdued global growth and slowing emerging market economies, coupled with resurgent supply for most commodities, has painted a rather uninspiring backdrop and made the asset class less attractive especially with the rally in equity markets," Barclays analysts said in a note. The only commodities attracting inflows in November were platinum and palladium, with $38 million. Shah attributed this to strong car sales in the United States and China, as the metals are used in catalytic converters. Persistent supply problems due to strikes and rising costs in South Africa, the primary producer of platinum, are also supporting prices. "Both these metals look like being in deficit this year and next," Shah said. Silver is the only major commodity on course to end 2013 in positive territory, with net inflows of $969 million to end-November. Silver has benefited from its industrial uses, with strong demand for silver in solar panels and electrical items this year. "The industrial numbers have helped it whereas metals such as nickel and aluminium are more over-supplied," Shah said. The industrial metals segment as a whole has had a choppy ride in 2013, and is down $86 million for the year to end-November. "Some investors were jittery about the strength of the Chinese and U.S. recoveries at the start of the year, which weighed on the complex," Shah said. "But going into 2014 we are likely to see an increase in flows into base metals, especially copper, where we've seen a number of miners cut back their supply estimates." At the end of November, BlackRock's data covered 912 commodity ETPs worldwide, worth some $122.4 billion. This is down from $200 billion at the end of 2012.

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

SECTOR NOV FLOWS YTD FLOWS Broad/Diversified -119 -395 Agriculture -125 -10 Energy -285 -1,366 Industrial Metals -93 -86 Gold -1,366 -36,416 Silver -135 969 Other Precious Metals 38 -41 Precious Metals Total -1,464 -35,488 TOTAL COMMODITIES -2,086 -37,347

Source: BlackRock

(Reporting by Claire Milhench; Editing by Anthony Barker)

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