Investment flows into Exchange Traded Commodities (ETCs) provide unique insights into investor sentiment across commodities markets in real time. Trading activity data encompasses both on-exchange and off-exchange (Over the Counter, “OTC”) transactions, providing a complete snapshot of the market on a daily basis. Flow data from ETF Securities (ETFS) – Europe’s largest commodity ETF provider - suggests that recent investment has been strategically focused on “real assets” as a hedge against the risk of medium term currency depreciation and inflation.
Precious metals account for a large proportion of the overall increase in ETFS flows, led by the company’s physically-backed gold products. Gold inflows have been relatively steady even when the gold price has corrected over recent years, highlighting the strategic nature of most holdings. It is interesting to note that the biggest inflows came when the scale of US quantitative easing and the fiscal cost of financial bailouts became apparent in early 2009, indicating gold is being used as hedge against sovereign (foreign exchange) and inflation risks.
The more industrially focussed precious metals – silver, platinum and palladium – and industrial metal ETCs saw rapid rises in inflows over the first half of 2009 as cyclical indicators rebounded. Recent months have seen these inflows slow, coinciding with renewed market uncertainty as to the sustainability of the global economic rebound as talk of ‘exit strategies’ to global government policy stimulus has surfaced. Note that with regard to industrial metals, the broad basket product has seen a majority of inflows, suggesting that most ETC investors were buying for a broad play on a “hard asset” theme as well as longer-term sector fundamentals.
Energy has been one of the strongest growth areas for ETFS inflows in 2009. This trend began with a surge of flows into oil ETCs at the start of 2009 as oil prices collapsed towards $30/barrel, continuing up until the start of the June quarter. Outflows have increased subsequently as investors have booked profits, with the oil price has settling into a new $60-$70 trading range (closer to analyst estimates of the marginal cost of oil production). At the same time natural gas products have seen sharply higher inflows, indicating some rotation in flows within the sector. Longer dated oil products have seen increasing interest subsequently, signalling the emergence of more strategic medium-to-long term oil ETC investment recently.
Agriculture ETC investment growth has similarly been impressive over 2009, with inflows of over three-quarters of a billion dollars year-tod-date (YTD). Inflows into agriculture ETCs started to rise before cyclical indicators turned up and before prices began to rise. As with industrial metals, flows have principally been into the agriculture basket product, with holdings steadily rising throughout price swings in the first-half of 2009. Agriculture’s low correlation to the business cycle has made it an attractive long term diversification tool for portfolios.
Based on the ETFS data, overall ETC flow trends indicate that investors’ are becoming more wary on the tactical outlook for oil and base metals, favouring more defensive options such as agriculture and gold. Flows into broad-based basket ETC products suggest that ETC investors have been buying in to ‘hard asset’ themes and the long term fundamental drivers of commodities as an asset class.
Daniel Wills is senior analyst at ETF Securities. The views expressed here are his own. No recommendation is inferred.