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Gold sparks record decline in global commodity ETP assets

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Assets under management for global commodity exchange-traded products posted a record quarterly decline in the second quarter mainly due to a fall in both prices and holdings for one specific market – gold, according to ETF Securities.

Total commodity ETP assets fell to $127-billion (U.S.) in the last three months, down from $186-billion at the end of the first quarter, said the provider of exchange-traded funds.

"Two-thirds of the decline in commodity ETP assets was caused by price declines and one-third by outflows," said Nicholas Brooks, head of research at ETF Securities, in an interview with Kitco News.

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Assets under management for gold ETPs fell to $82.3-billion at the end of the second quarter from $131-billion at the end of the first. Silver ETP assets fell to $11.1-billion from $17.7-billion.

ETF Securities calculated the data on assets for all ETPs around the globe, not just those in North America. The firm also listed the figures in dollar amounts rather than physical volume, to have a consistent method of comparison since various commodities trade in different units, such as ounces for gold, bushels for grains and barrels for oil. Also, whereas some ETPs such as metals hold physical commodities, others do not and trade on the basis of futures contracts instead.

Otherwise, looking strictly at physical holdings, gold ETPs held 67.9 million ounces at the end of the second quarter, down from 80.9 million at the end of the first, Brooks said.

Total net outflows from commodity ETPs (actual selling only) amounted to $19-billion in the second quarter. Gold accounted for $18.5-billion, or 97 per cent, of the total ETP selling. This was the largest outflow from gold ETPs since the first one was created in 2003, ETF Securities said.

"The bulk of those outflows were in April and out of U.S.-listed gold ETPs," Brooks said. "In May and June, the outflows in gold ETPs moderated quite significantly."

Gold ETP outflows in April were $8.7-billion, then $6-billion and $3.9-billion the following two months, he said. The slower pace of outflows since April "indicates to me that it is possible the worst is behind," Brooks said.

Of the $8.7-billion in outflows for April, $7.7-billion were from North America, or 89 per cent of the total. By contrast, North America typically accounts for a smaller 59-per-cent share of global gold ETP holdings, Brooks explained.

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Rising real interest rates in the U.S. as a result of improving growth prospects and expectations of a reduction to Federal Reserve's bond-buying program, together with a strengthening U.S. dollar, caused the gold price to fall 21 per cent over the quarter, ETF Securities said. Tactical and momentum investors sold ETPs into the price correction.

"It appears a large driver of the gold outflows in the second quarter was a panic sell-off by U.S. investors in gold ETPs," Brooks said. "I'm guessing a part of it is there are quite a lot of hedge funds in the U.S. gold ETPs. I suspect when they saw a very sharp drop in the gold price in mid-April, many of these investors may have had margin calls, which forced them to sell even more aggressively."

This led to a decline in ETP holdings at a time when sales of coins picked up on the price decline, he explained.

Brooks described platinum as the "bright spot" in the ETP world during the second quarter with $712-million of net inflows. When factoring in both inflows and the decline in prices, platinum assets under management rose more modestly to $2.99-billion at the end of the second quarter from $2.82-billion at the end of the first.

"That was driven primarily by the tightening supply/demand fundamentals for platinum," Brooks said. He cited market worries over future supplies due to factors such as potential labour issues and uncertainty about the availability of electricity in the key producing nation of South Africa. "Therefore investors were positioning for potential price increases later this year," Brooks said.

Palladium ETP assets fell to $1.4-billion from $1.6-billion. There were strong inflows in April and May, but these reversed in June on concerns about China's growth as domestic liquidity conditions tightened, ETF Securities said. The country's auto market is mostly gasoline-powered vehicles that rely upon palladium rather than platinum.

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Brooks described mixed second-quarter ETP flows for copper, with outflows in April but then inflows in May and June. The net change for the quarter was an outflow of $70-million.

Initially, Brooks said, investors were negative toward copper on a view the market would have an oversupply in 2013. However, supply forecasts were later scaled back after shutdowns at the Bingham Canyon mine in Utah and Grasberg mine in Indonesia.

The metals complex wasn't the only one to see selling in the second quarter. Agriculture ETPs had net outflows of $108-million, reversing most of the inflows from first, said ETF Securities. Rising supply expectations for grains and soybeans after record plantings in the U.S. prompted investors to pare back ETP holdings, the firm said.

Analysts emphasized that flows for these products are likely to hinge on weather conditions, and thus prospects for the harvest, over the course of the summer.

Meanwhile, ETF Securities reported outflows from oil ETPs of $170-million in the second quarter. There were modest inflows in April and May but outflows in June. For oil ETPs, Brooks described investors as price sensitive, tending to cut tactical long positions when they feel West Texas Intermediate crude prices are rising too quickly.

When also factoring in price movement, assets under management for oil ETPs fell to $4-billion from $4.3-billion after the first quarter. Assets for natural gas ETPs slid to $1.7-billion from $2-billion.

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