Commodities

Commodity ETP assets increase USD29bn to USD200bn in 2012

Commodity exchange-traded product assets rose to a year-end record high of USD199.8bn in 2012, an increase of USD29bn compared to the end of 2011.

Commodity ETP assets have nearly doubled since the end of 2009 and have increased nearly seven-fold over the past five years as investor demand for hard assets and familiarity with commodity ETPs has increased.

Gold ETPs saw the largest increase, with assets rising USD24bn to a year-end all-time high of USD146.6bn. Silver ETPs saw the next largest increase in assets, with assets rising USD2.7bn to USD17.7bn. Diversified broad commodity ETPs (those that track broad commodity index benchmarks) were the next most popular category of commodity ETP, with assets rising USD1.0bn over end 2011 levels to USD16.2bn.

2012 was characterized by a combination of fluctuating investor views on the global growth and sovereign debt outlook. In the first quarter of 2012, rising growth expectations caused investors to increase weightings in more cyclical commodities. However a weakening of US and China growth indicators and increased concerns about Europe’s sovereign debt issues led to net outflows from commodity ETPs in 2Q 2012. In 3Q and 4Q investor demand for gold ETPs soared as investors sought to hedge against worst case US fiscal cliff and debt ceiling scenarios as well as an intensification of central bank quantitative easing policies. The second half of the year also saw a strong pick-up in demand for more cyclical commodity ETPs as US and China economic indicators began to improve.

In early 2013 we appear to be seeing an extension of the trends of 4Q 2012, with improving US and China growth indicators adding demand for cyclical commodity exposures such as base metals, broad commodity exposures and energy, but a looming US debt ceiling fight and concerns about deteriorating growth and debt conditions in Europe keeping demand for perceived risk hedges such as gold ETPs high.
 
In 4Q 2012 global commodity ETP inflows increased by USD6.1bn, continuing the strong trend of 3Q when flows rose by USD8.8bn. Total inflows for the full year were up USD21.4bn.

Gold ETPs saw the largest inflows, with net new buying of USD4.5bn in 4Q. This follows on net new inflows of USD7.7bn in 3Q, bringing total inflows in 2012 to USD16.7bn

Diversified broad commodity ETPs saw the next largest increase in flows in 4Q, with net inflows of USD568m 4Q and USD1.2bn for the full year.

Crude oil ETPs reversed two consecutive quarters of net outflows in 2Q and 3Q with investors buying USD445m of oil ETPs in 4Q and USD821m in full-year 2012.

Natural gas ETPs also saw strong inflows in 4Q 2012, with net new purchases of USD279m  as signs of reduced US production and expectations of weather-driven increased demand caused investors to anticipate further price gains. Natural gas ETPs in 2012 received USD828 of net new flows.

A stand-out surprise commodity in 4Q was copper. Copper ETPs saw a USD115m surge of inflows in 4Q following net outflows in 2Q and 3Q. The increase likely reflects investors increasing bullishness on Chinese economic growth and continued copper supply constraints.

Another surprise commodity flow was the USD60m increase in flows into coffee ETPs in 4Q. While coffee price fundamentals remained poor in 4Q, the very sharp drop in coffee prices and net longs in the futures market appears to have attracted investors.

Nicholas Brooks, head of research and investment strategy at ETF Securities, says: “The nearly USD30bn rise in commodity ETP assets to USD200bn in 2012 was primarily driven by strong investor demand for gold and silver ETPs to hedge against currency debasement as the world’s major central banks made clear their intention to extend current asset purchase programs. Broad commodity, oil and industrial metal ETPs – particularly copper - also saw a pick-up in demand as central bank policies and improved US and China data helped boost interest in more cyclical assets in the latter part of the year.

“As we move into 2013, demand for gold ETPs remains strong as investors hedge against worst case US budget ceiling outcomes and potential major reserve currency debasement scenarios as US, European and Japan government debt levels continue to rise.  The demand for broad commodity, industrial metal and white precious metal ETPs will depend very much on whether the US averts a major debt crisis over its self-imposed debt-ceiling and whether the improvement in US and China economic growth proves to be sustainable.”

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