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ETF Securities: Commodity ETP Assets Decline In 2013 Mainly Due To Gold

By Allen Sykora of Kitco News
Tuesday January 07, 2014 9:00 AM

(Kitco News) -Global assets under management in commodity-related exchange-traded products fell sharply during 2013 mainly due to a steep fall in gold assets, said ETF Securities Tuesday.

However, AUM for ETPs for platinum group metals rose. And whereas AUM for silver ETPs fell, this apparently was due to the lower price, as otherwise the metal had a net inflow, according to ETF Securities’ data.

AUM declined to $122.2 billion at the end of 2013 from $199.8 billion at the end of 2012 for commodity ETPs, said ETF Securities, which provides a number of metals exchange-traded funds. AUM for gold ETPs fell to $75.9 billion from $146.6 billion.

The firm releases a quarterly report using the dollar amount for assets as a common measurement, since different commodities otherwise are priced in different quantities – such as ounces for gold, metric tons for copper, barrels for oil. Precious metals ETPs are backed by metal put into storage, while others such as energy and agricultural ETPs use futures contracts.

The decline in overall commodity AUM was the most on record, said Nicholas Brooks, head of research and investment strategy for ETF Securities.

“Ninety-one percent of the decline in commodity ETP assets under management was driven by gold ETPs -- both the decline in the price of gold and outflows from gold ETPs,” Brooks said in an interview with Kitco News. He later added, “outflows from non-gold commodity ETPs accounted for less than 1% of the total AUM decline.”

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Investors turned away from gold due to factors such as a rise in Treasury yields and lack of inflation, Brooks said. “But, they generally held their positions in commodities excluding gold.”

In the case of gold, the AUM reflects the combination of the price of commodities and metal held in storage. Both took a hit in 2013, as gold fell sharply and total ETP gold holdings declined to 56.67 million ounces at year-end from 84.62 million as of the end of 2012. ETF Securities estimated that of the roughly $71 billion gold AUM decline, 46% was caused by a 28% fall in the gold price and 54% by investor outflows.

Gold ETP outflows peaked in second quarter, when AUM plunged by a record $49 billion, ETF Securities said. Forty-eight percent 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 the third quarter but fell back again in the fourth as investors anticipated the tapering of the U.S. Federal Reserve’s bond-purchasing program, which was announced in mid-December.

Silver, Platinum ETPs Draw Inflows Despite Price Falls

Non-gold commodity ETP assets fell by a more modest $6.9 billion to $46.3 billion in 2013. In contrast to gold, investor outflows accounted for only 9%, or $606 million, of the decline in non-gold ETP AUM, while price declines accounted for 91% of the fall in AUM.

Assets under management for global platinum ETPs rose to $3.6 billion from $2.6 billion, and palladium AUM rose to $1.42 billion from 1.38 billion.

Silver AUM fell to $12.1 billion from $17.7 billion. However, even though the price of silver fell and led to lower AUM, the metal recorded net inflows, unlike gold, said ETF Securities. Silver ETP holdings were listed at 622.96 million ounces at year-end, compared to 608.19 million at the end of 2012.

Platinum and silver ETPs received $1.3 billion and $841 million of inflows, respectively.

“That reflects investors in 2013 were shifting toward growth assets,” Brooks said. “I think the pickup in U.S. economic data, continued relatively robust Chinese data and generally improving sentiment toward the global economy caused investors to move away from defensive assets and into more cyclically sensitive assets. Platinum and silver both fall into that category.”

The price of silver tends to track gold. However, Brooks pointed out that roughly half of silver demand is for industrial purposes.

“The silver price fell so sharply in the early part of the year that as the silver price moved down to around $20 an ounce, a lot of medium- to longer-term investors looked at this as a good entry point for building their silver holdings,” Brooks said.

Platinum is also used industrially, with the main use for automotive catalytic converters.

“Platinum is trading well below its marginal cost of production,” Brook said. “So, for longer-term investors, platinum looks extremely cheap at these levels.”

Inflows Into Coffee ETPs Strong

Coffee ETPs were also strong, with a $203 million inflow the greatest on record, ETF Securities said. This occurred as Arabica coffee prices declined to a seven-year low and futures positioning moved strongly negative. “That attracted investors looking for a potential mean reversion in 2014,” Brooks said.

ETF Securities cited apparent range-trading in ETPs for energy products, with buying on price dips but selling at higher prices.

“Just in the last couple of weeks, where we saw a spike in the Henry Hub natural gas price, we’ve also seen very strong outflows from natural gas ETPs,” Brooks said. “This is the opposite of what happened in the summer months, when the Henry Hub natural gas price was dropping from $3.50 toward $3 (per million British thermal units). There were very substantial inflows.

“It’s been clear for a number of years…that ETP investors tend to range trade natural gas. They do with oil also.”

Oil ETPs had outflows of $1.5 billion in 2013, making this the commodity with the largest outflow after gold, ETF Securities said. Ninety-two percent of the outflows took place in the first quarter, November and December. Oil prices spiked first on Middle East supply risk concerns, and then again in November and December on U.S. inventory declines.

Natural gas ETPs had outflows of $687 million in 2013, with outflows concentrated in March and April, when the Henry Hub natural gas prices surged towards $4.50 and again in December as the price rose to a similar level. Between June and October, as the spot price dropped down to the $3.50 range, natural gas ETPs saw five months of consecutive inflows as investors were attracted by the lower price.

Agriculture ETPs saw outflows of $42 million in 2013, but with wide disparities between individual commodities, ETF Securities said. While there was a jump in coffee AUM, diversified broad agriculture ETPs posted $232 million of outflows.

Commodity Prospects In 2014 Depend On Economy

Prospects for commodities in 2014 hinge on the macro environment, Brooks said.

“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,” he said. “Strong demand growth together with the risk of supply disappointments should be broadly price 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 U.S. dollar as the U.S. 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 U.S. economic recovery falters.”

By Allen Sykora of Kitco News; asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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