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Demand for energy and precious metals exposure remains strong


Recent price corrections in the commodity markets have signalled a buying opportunity to many investors.

Amidst deteriorating economic conditions and further signs of slowing global growth, commodity exchange-traded products in the energy and precious metals sectors attracted net new inflows during the second quarter.

Investors took advantage of recent price movements in crude oil and natural gas, whilst gold and silver products were also in demand, according to the latest edition of the Global Commodity ETP Quarterly, released today by exchange-traded investment product provider, ETF Securities (UK).

The global commodity ETP market contracted by seven per cent during the second quarter to reach USD175bn, largely as a result of the broad price declines which have occurred in recent months. Robust demand for products that track single commodities such as gold, silver and oil helped to offset outflows from those which provide more broadly diversified exposure to the asset class. Overall, net outflows from all commodity ETPs worldwide amounted to just USD1.1bn.

Precious metals ETPs attracted net inflows of USD702m during the second quarter, as investors looked to hedge against continued global financial, economic and political turmoil. Gold ETPs attracted the largest inflows in the sector – with USD570m of net new funds – followed by silver ETPs, which attracted a further USD269m

Palladium ETPs attracted USD36m in net new assets. The resilience of the US and Chinese gasoline auto markets – palladium’s main sources of demand –  relative to other industries in those countries may help to explain the demand. By contrast, demand for platinum – a metal with significant exposure to the rapidly slowing European diesel auto markets – was less favourable. Despite relatively strong inflows during the first quarter of the year, platinum ETPs saw USD80m in net outflows between April and June.

ETPs that provide exposure to natural gas attracted USD205m in new assets during the second quarter. Higher electricity consumption in the US, driven by warmer than expected weather, was partly responsible for the increase in natural gas demand.

ETPs that provide exposure to crude oil meanwhile had a mixed quarter. Investors initially cut their exposure by a net USD73m in April and May, as further signs of slowing global growth emerged and concerns of imminent military activity in the Middle East abated somewhat. Saudi Arabia, meanwhile, increased its oil output significantly during the quarter. A sharp correction in price may have helped to reverse the flow of money out of crude oil ETPs, and in June such products attracted net inflows of USD515m.

Deteriorating economic and financial conditions in Europe combined with signs of slowing growth in the US and China, hit broad commodities and other cyclical assets during the second quarter. ETPs that track industrial metals such as copper – which attracted strong inflows through the first four months of the year – saw net outflows in May in June. Broad diversified commodity ETPs, such as those tracking the broad DJ-UBS and GSCI commodity indices, suffered USD1.1bn in net outflows.

ETPs that provide exposure to agriculture – a sector that has seen five consecutive months of weakened demand – saw outflows of USD494m during the quarter. Products which provide broad diversified exposure were particularly hard hit. Generally poor growing conditions for many crops are driving a number of key agricultural commodity prices higher, and it will be interesting to see if money starts to flow back into the sector next quarter.

Nicholas Brooks, head of research and investment strategy at ETF Securities, says: "In an era of high government debt and unconventional monetary policy, investor demand for exposure to hard assets remains strong.  We saw a general de-risking across asset classes during the second quarter and, naturally, cyclical assets such as commodities were particularly hard hit. Despite challenging macroeconomic conditions, demand for commodity ETPs held up well. Gold continues to see particularly strong demand as concerns about European sovereign and financial risk, possible further US dollar currency debasement and a lower price attract investors.  Oil has also seen a pick-up in demand as a number of investors view the sharp fall in the oil price as a longer term buying opportunity. The outlook for the second half of this year will continue to be highly dependent on global growth and risk appetite trends, with government and central bank policy likely to continue to play a larger than usual role driving the broad market direction."

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