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The Great Commodity Rotation

Commodity ETPs: In 1Q 2013, as global growth and risk appetite picked up, commodity investors rotated out of gold ETPs and into more cyclical commodity ETPs such as silver, copper, palladium, platinum and broad commodity trackers. Gold ETPs saw $9.2bn of outflows during the quarter as improving US growth data drove up US interest rate expectations, increased speculation that quantitative easing might be ratcheted back and boosted the US dollar. All of these factors were gold negative and caused tactical ETP investors to pare back their positioning. A similar trend occurred in the futures market where net speculative longs in gold futures fell back to end 2008 levels.

Key commodity ETP flow trends in 1Q 2013:

  • While gold ETPs saw outflows, most cyclically-geared commodities saw strong inflows.  Silver received the strongest inflows of any single commodity, with $875mn of net new buying. Broad diversified commodity ETPs were next with $288mn of inflows. Copper inflows jumped $178mn while palladium received $131mn of inflows.
  • Agriculture ETPs also saw strong inflows during the quarter, with broad diversified agriculture ETPs receiving $117mn of new inflows. The inflows are significant as they come following nearly 20 consecutive months of selling to the end of 2012. It appears that sharp price declines since last summer, low inventories for many key crops and poor weather attracted investors. At an individual agriculture commodity level, coffee saw the largest inflows during the quarter as the large Arabica price correction, decline in net speculative longs and concerns about rust disease hurting supply attracted investors.
  • Both oil and natural gas ETPs saw large net outflows as higher prices caused investors to take profits. Oil investors appeared to view the move by Brent oil through the $115/bbl level as excessive and sold heavily in January, with selling tapering off in February and March. Natural gas investors, after buying strongly in December as the Henry Hub spot price fell toward the $3.3/MMBtu level, aggressively reduced their positions in March as the spot price broke towards, and then through, the $4.0/MMBtu level.

Nicholas Brooks, Head of research and investment strategy at ETF Securities said: “In early April we appear to be at a turning point for commodities, with the bullishness towards cyclical commodities of the first 10 weeks of the year having been given a shock by the near-default of Cyprus in the latter part of March.  Since the Cyprus deposit confiscation, gold inflows have resumed (albeit tentatively) and flows into more cyclical commodity ETPs have slowed or reversed.  How Europe deals with Cyprus and potential contagion to other peripheral European economies, and the sustainability of strong growth data from the US, will likely decide whether the recent reversal in the rotation out of gold into cyclical commodities is the beginning of a new trend or just a pause before the cyclical bull run continues.”

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