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Investors dump commodities for the second half

Oil and metal prices have faced a beating this year, with fresh data showing investors have been offloading commodities in the last quarter on fears that interest rate hikes later in the year will toss up even more market volatility.

Data from UBS shows investors dumped holdings in global energy Exchange Traded Funds (ETFs) by some 50 percent in the last three months, as the market prepares for a U.S. Federal Reserve rate rise later in the year.

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Oil and gold
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Global energy ETF holding stood at just $8.9 billion as of the start of this week according to UBS, with flows stabilizing in recent weeks, despite the prospect of increased supply from Iran, following a deal with the West that could result in the removal of economic sanctions.

Weakening demand, currency headwinds, interest rate rises and a sell-off in Chinese stocks have all put pressure on the outlook for the commodity sector, with gold and copper the other major casualties.

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This week has seen gold prices tumble to five-year lows and U.S. oil prices dip below $50 a barrel for the first time since April, with prices stabilizing on Thursday.

Oil prices steadied on Thursday after a weaker dollar helped offset the negative impact of rising U.S. stockpiles, which drove U.S. crude prices to near three-month lows. Meanwhile, gold hovered around a five-year low at $1,102 an ounce, rebounding slightly from the sharp fall seen earlier in the week.

Net long exposure to gold, or expectations that the price of the yellow metal will rise, has seen significant declines in the last month with positioning reaching its lowest levels seen since January 2014 according to UBS.

While the bank suggests the magnitude of the declines and the level of positioning hint that the move is overdone and markets should recover from here "any recovery is likely to be capped," with weakness resuming heading into the September Federal Open Market Committee meeting.

Talk about a rise in interest rates at the Fed's September meeting has been fueled by hawkish comments from the U.S. central bank's officials. Fed Chair Janet Yellen said last week that rates were likely to rise this year depending on data, while St. Louis Fed President James Bullard said on Monday that there was a better-than 50 percent chance of rate rise in September.

"I think what we are seeing in commodity markets is a number of factors coalescing, I think the key thing that we have got there is growth in a crucial area of the world in terms of commodity demand is slowing down and that is Asia," chief investment officer of Cazenove Capital, Richard Jeffrey told CNBC.

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"You should have sold out (of oil and gold) six months ago. I think there is the potential for further weakness, when we look at the fundamental backdrop there is clearly the potential for gold to move lower," he said.

Copper ETF flows were largely hit by the Chinese equity sell-off and persistent fears of oversupply in China, the data also show. Copper for three-month delivery fell to a six-year low earlier this month to trade around $5,339 per ton on the London Metal Exchange, with Goldman Sachs slashing its outlook for the industrial metal by 44 percent through 2018 on Wednesday.

"We substantially lower our short, medium, and long-term copper price forecasts on the back of lower Chinese copper demand growth forecasts, increased conviction in copper supply growth over the next three years, and less conservative assumptions regarding mining cost deflation in dollar terms," Goldman Sachs commodities analysts, led by Max Layton said.

The bank forecast the metal will hit $5,200 a ton on a three-month basis, down from current levels of around $5350. On a 12-month basis, they see the price falling to $4,800 and thereafter the bank's new price forecasts for both 2017 and 2018 is $4,500 per ton, down from $7,000 and $8,000 a ton respectively.