Commodity ETP Assets in 2013 Decline by Most on Record as Gold Falls Out of Favour

Global commodity ETP assets under management (AUM) declined by $78bn to $122bn in 2013 on the back of a sharp decline in the gold price and outflows from gold ETPs…..

Nicholas Brooks, Head of research and investment strategy at ETF Securities

ETF Securities Research

The decline in gold ETP AUM accounted for 91% of the decline in all commodity ETP assets in 2013. Non-gold commodity ETP outflows accounted for less than 1% of the AUM decline, highlighting investors more balanced views towards commodities other than gold
Key commodity ETP flow trends in 2013:
– Gold ETP AUM dropped to $76bn from $147bn at the start of the year, taking global gold ETP assets back to April 2010 levels.  Of the $71bn AUM decline, 47% was caused by the 28% fall in the gold price and 53% was caused by investor outflows. A strong US dollar, a sharp rise in US real interest rates and reduced demand for gold as an insurance asset were the main drivers of the AUM decline.
– Gold ETP outflows peaked in 2Q 2013, with AUM plunging by a record $49bn during the quarter.  49% of all gold ETP outflows in 2013 and 63% of the year’s AUM decline occurred in the second quarter. Gold ETP AUM rose in 3Q but fell back again in 4Q as investors anticipated the tapering of the US Fed’s bond purchasing program.
– Non-gold commodity ETP assets fell by a more modest $7bn to $46bn in 2013.  In contrast to gold, investor outflows accounted for only 10% ($692mn) of the decline in non-gold ETP AUM, with price declines accounting for 90% of the fall in AUM.
– Platinum and silver ETPs received the largest inflows in 2013.  Platinum and silver ETPs received $1.2bn and $847mn of inflows respectively as investors shifted away from gold towards commodities perceived as more positively tied to the global industrial recovery. Palladium was less popular, with inflows relatively stable at $18mn following $206mn of inflows in 2012.
– Coffee ETPs surprise with strongest inflows on record.  Coffee ETPs received $204mn of inflows, the largest on record, as the Arabica coffee price declined to a seven year low and futures positioning moved strongly negative, indicating contrarian investors are looking for the Arabica coffee price to mean-revert.  
– Oil ETPs used by investors to range-trade the oil price.  Oil ETPs in aggregate saw $1.6bn of outflows in 2013, the commodity with the largest outflows after gold. The full year number, however, masks the ebb and flow over the course of the year, with nearly 90% of oil ETP outflows taking place in 1Q and November and December when oil prices spiked, first on Middle East supply risk concerns, and then again in November and December when prices rose on US inventory declines.
– Natural gas ETPs also saw range-trading flows in 2013.  While natural gas ETPs saw $647mn of outflows for the full year, the third largest after gold and oil, the outflows were concentrated in March and April, when the Henry Hub natural gas prices surged towards $4.5MMBtu and again in December as the price rose to a similar level. Between June and October, as the spot price dropped down to the $3.5MMBtu range, natural gas ETPs saw five months of consecutive inflows as investors were attracted by the lower price.
– Agriculture ETPs saw modest outflows, with wide disparities between individual commodities.  Although agriculture ETPs in aggregate saw a modest $47mn of outflows in 2013, investor flows diverged widely, with coffee ETPs seeing $204mn of inflows on one end of the spectrum and diversified broad agriculture ETPs seeing $238mn of outflows on the other.  Historically, sharp declines in agriculture prices have tended to attract investors looking for mean-reversion price moves. Corn and wheat ETPs saw small inflows on this basis, and we anticipate further inflows in 2014 given the extent of 2013 price declines.
Nicholas Brooks, Head of research and investment strategy at ETF Securities said:
“The main reason for the large decline in global commodity ETP assets in 2013 was a sharp fall in the gold price and investor holdings of gold ETPs.  Outflows from commodity ETPs other than gold were in fact quite modest, with commodities more heavily used in industry such as platinum and silver seeing strong inflows.  Oil and natural gas ETPs tended to see strong inflows on price declines and selling on sharp price gains as investors used the ETPs to trade price ranges. Flows into agriculture ETPs were mixed, with sharp falls in coffee, corn and wheat prices attracting inflows but broad exposures to the sector seeing outflows.  
The outlook for commodities in 2014 will depend very much on the macro environment. If the current strong global growth recovery continues, commodities other than gold should benefit.  A number of commodity prices currently reflect large expected supply surpluses in 2014.  Strong demand growth together with the risk of supply disappointments should be broadly priced supportive and investor flow-supportive in 2014 in our view.  Gold is the wild card. The gold price and investor positioning today reflects near unanimous negative sentiment on gold’s prospects, based on expected higher global interest rates and a strong US dollar as the US economy recovers. Any disappointment to this scenario will likely drive the gold price higher, making it one of the better hedges against the risk the US economic recovery falters.”





Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.

    MA Weekly 07.10.13 1


US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.

MA Weekly 07.10.13 2


Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.

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