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Global commodity ETP assets reach record levels


Commodity Exchange Traded Products (ETPs) around the world got off to a strong start in 2012, according to the latest edition of the Global Commodity ETP Quarterly released  by ETF Securities (UK) Limited.

A combination of higher commodity prices and increased demand for ETPs pushed assets in worldwide commodity ETPs up USD19bn to USD189bn by the end of the first quarter of 2012 – the highest quarter-end level on record. A rebound in US economic growth and an orderly restructuring of Greek sovereign debt led to a general rise in risk appetite and helped drive broad-based buying of commodity ETPs. Inflows in the first quarter rose by USD7.5bn – the largest quarterly rise since the second quarter of 2010.

Growth upturn benefitted non-precious metal ETPs – During the first three months of 2012, worldwide commodity ETPs received the largest inflows in nearly two years. Interestingly, demand was far more broad-based than in recent quarters.

Historically, precious metals – and gold in particular – have tended to dominate headline commodity ETP flow trends. Yet during the first quarter of 2012, in addition to the USD4.4bn that flowed into precious metals ETPs, USD3.1bn flowed in to other commodity ETPs – the largest non-precious metals inflows in over two years. Improvements in the US economy and the reduction of immediate sovereign risks in Europe has caused a revival in investor risk appetite that appears to have benefited a wide range of more cyclical commodities such as copper, tin, oil, platinum, palladium, silver and broad diversifieds.

The gold price corrected sharply in the latter part of the first quarter of 2012. Improvements in the US economy caused investors to scale back their expectations for further near-term quantitative easing from the US Fed, and the US Dollar strengthened as interest rate differentials moved in its favour.

Yet despite the gold price correction, demand for gold ETPs remained robust in the first quarter of 2012 with USD3.6bn of new inflows – the third consecutive quarter of strong inflows. Although the cyclical rebound in the US economy has scaled back quantitative easing expectations and pushed up market interest rates, it appeared that the longer term factors supporting the gold price and gold ETP demand had not changed.

During the first quarter of 2012, USD1.2bn of net new money flowed into oil ETPs around the world, reversing six consecutive quarters of outflows. Demand for oil ETPs was the strongest since the second quarter of 2010 and, across all commodity ETPs, only gold saw greater inflows.

While the rebound in the US economy and continued strong growth in China has likely played a role in driving the oil price rally and renewed demand for oil ETPs, the deterioration of the political situation in Iran and the rising risk of potential military conflict in the region had also likely contributed.

Nicholas Brooks (pictured), Head of Research and Investment Strategy, says: "The first quarter of 2012 was a good one for commodity ETPs, with rising commodity prices and strong inflows pushing total assets to their highest quarterly close on record. There were three key drivers behind this. The first is the rebound in global growth and risk sentiment. The second is an increasing concern about the implications of a potential military conflict in the Middle East, which has added upward pressure to the oil price. The third, and largest, contributor to overall commodity ETP growth is continued demand for gold ETPs as portfolio diversifiers, hedges against currency debasement and inflation risks in an environment of low real interest rates.

“With the Iran situation unlikely to be resolved in the near future and the structural factors supporting gold demand intact, two of the three key drivers of commodity ETP demand appear to remain in place. The key wild cards for the remainder of 2012 are likely to be the sustainability of the US economic recovery and Europe’s ability to contain its sovereign crisis and prevent it from derailing a broader global economic recovery."

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