Assets under management (AUM) in commodity exchange traded products fell to their lowest level in the third quarter of this year since the beginning of 2010, as a strong U.S. dollar and concerns over growth in China knocked prices down.
While assets fell by 10 percent to $110.7 (€87) billion globally, almost all of this (96 percent) was down to price decline as opposed to investor outflows, which only totalled $550 million over the three months.
Nick Brooks, head of research and investment strategy at ETF Securities, explains that this shows that ETP investors are pretty resilient in the face of price decline.
“We saw leveraged tactical players get out of commodities last year and it has left the market with strategic investors with medium to long-term view investors,” he told ETF.com.
Indeed, commodity ETPs that track broad commodity indexes saw inflows of $561 million in the third quarter. This suggests that strategic investors are starting to view commodities as a more attractive asset class as equity and bond market valuations have become more stretched and commodity prices have declined.
Commodity prices have fallen in the last six weeks as the U.S. dollar has surged, but it remains unclear whether this trend is likely to continue.
Brooks argues that commodities are trading at their lowest level relative to the cost of production since 2008.
“In the long run they prices can’t stay there because it isn’t economical. It is also possible that the forces driving the dollar strengthening have been priced into the currency now, particularly the ECB doing QE and the U.S. raising rates,” he said.
“It is likely why the dollar has been so strong and therefore the price surge has already happened [meaning that there won’t be another surge and commodity prices won’t drop any lower].”
Gold ETPs accounted for nearly 60 percent of the decline in AUM in global commodity ETPs. This was followed by outflows in platinum of $194 million as the price dropped off and investors cut stretched long positions.
However, investors took a shine to silver and agriculture ETPs. Silver ETPs saw the largest inflows in the last quarter with investors putting $452 million into the products. The same story was also true for agriculture ETPs, which saw inflows during the third quarter as low prices attracted investors into most of the grains as well as cotton.