] “All key commodity sectors saw inflows during the quarter except for agriculture and livestock. Precious metals saw the strongest investor demand with $430m of inflows, followed by diversified broad commodity ETPs with $172m, energy with $135m and industrial metals with a more modest $15m. Agriculture and livestock saw $477m of outflows. Increasing confidence in the US recovery, a positive turn in China growth after three years of slowdown, and expected further easing measures by China’s policy-makers has boosted prices and investor sentiment towards commodities,” says Nicholas Brooks, head of research and investment strategy at ETF Securities.
Commodity ETPs with the strongest demand in Q2 were platinum and palladium, with $400m and $410m of inflows respectively. Rising global auto demand (autocatalysts are a key source of demand for both metals) together with rising supply concerns due to mine strikes in South Africa and potential Russia export restrictions has exacerbated fears that already large supply deficits will worsen and has pushed prices higher for both metals. We anticipate these trends will continue in H2.
Gold ETPs saw mixed flows, with US listed gold ETPs seeing $586m of outflows while Europe and other country listed gold ETPs saw $483m of inflows, leading to net quarterly outflows of $103m. Most of the divergence in the gold ETP flow trends took place in April. The most likely explanation for the divergence is that during that period European investors were focusing on the close-to-home potential risks of a Russian invasion of the Ukraine, while US investors mostly maintained their bullish view on risk assets as US equities continued to hit new highs. With geopolitical risks still high and many risky asset classes trading at stretched valuations, we believe gold ETP demand will continue to improve in H2 2014 as investors look for hedges against possible risk market corrections.
Diversified broad commodity ETPs saw the largest inflows after platinum and palladium, with total inflows of $172m in Q2. The inflows reflect improving sentiment towards commodities as an asset class as China growth has shown signs of picking up and China policy-makers have made clear they are moving into stimulus mode after three years of tightening. It is interesting to note that the largest inflows were into diversified broad commodity ETPs that exclude agriculture, with $89m of new flows into these ETPs versus $75m into those that include agriculture, highlighting generally negative investor views towards agriculture.
Agriculture ETPs as a group saw $468m of outflows, with broad diversified seeing the largest outflows followed by sugar, corn, cocoa and coffee. The outflows are likely a combination of profit-taking and expectations of improved growing conditions for a number of key agriculture commodities. If an El Nino weather event occurs later this year (current NOAA forecasts put the probability at 70%), speculative flows may return.
Energy ETPs saw $175m of inflows in Q2, with most of the flows ($169m) going into oil ETPs. Increasing violence in Iraq has raised concerns about supply disruptions, pushed oil prices higher and driven oil ETP demand higher. Natural gas ETPs saw $21m of outflows as investors took profits on the natural gas price surge earlier in the year. Industrial metals saw a modest $15m of inflows, with nickel seeing the strongest inflows ($38m) as Indonesia’s ban on ore exports drove prices higher.