Commodity ETPs Back In Vogue Led By Silver

April 10, 2014

Commodity exchange traded products saw investor inflows return in the first three months of the year with following outflows for all four consecutive quarters last year.

Commodity ETPs received $271 million of net new inflows in the first quarter of 2014, marking the first increase since the last quarter in 2012. The increase helped push total assets invested in commodity ETPs to $122.4 billion at the end of March compared to $122.1 billion at the end of last year, according to data from ETF Securities.

The inflows were driven by precious metals, agriculture commodities and industrial metals, with silver ETPs topping the inflow charts as investors looked to the metal as a leveraged play on improved sentiment towards gold.  Silver was also one of the few commodity ETPs to see inflows in every month of the first quarter.

Nicholas Brooks, head of research and investment strategy at ETF Securities said: “After seeing selling in January, gold ETPs moved strongly back into favour in February and March as investors revised down their highly bullish US growth assumptions and revised up the global risk outlook. Broad commodity ETPs also saw a turn in sentiment, with asset allocators rotating into the asset class as an alternative to overstretched developed market equities.

Brooks added: “Platinum ETPs saw strong demand as an extended strike in South Africa raised supply concerns.  Coffee and natural gas ETPs, on the other hand, saw aggressive profit-taking as prices of both commodities surged on weather-related supply issues. Oil ETPs also saw strong investor profit taking as the WTI oil price rallied on strong US demand for oil products early in the year.”

Two physically-backed palladium ETFs were launched by Absa Bank (a subsidiary of Barclays) in South Africa last month. While they can help investors access palladium more easily they could also contribute significantly to a tightening supply of palladium.

According to a note from Commerzbank, as of last Friday, the two new ETFs had drawn in 113,000 ounces of palladium. Given the high trading volumes of recent days, we should assume that South African investors will already have “stripped” the market of 200,000 ounces by the end of this week.

“What makes this situation even more difficult is the fact that the palladium for these ETFs – according to the rules set by the South African Reserve Bank – has to be produced in South Africa. Last year, South Africa produced 2.35 million ounces of palladium, which accounted for 37 percent of the world’s total palladium mining production,” said Eugen Weinberg, head of commodity research at Commerzbank.

The note continued that even without the new ETFs, the supply situation for platinum and palladium is likely to have been fairly tight in view of the strikes in South Africa. This is also against a backdrop of sanctions against Russia, the world’s largest palladium producer, which could cause prices to explode.

Other evidence that commodities were back in favour came from a pick-up in the commodities prices on the DJ-UBS commodity index, which lifted by 7 percent.



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