November outflows confirm dismal year for commodity ETPs

Thu Dec 5, 2013 3:50pm GMT

* 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

    By Claire Milhench
    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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