LONDON Investors sold out of commodity exchange-traded products (ETPs) in June after the U.S. Federal Reserve signalled it would wind down its economic stimulus programme, pushing up real interest rates and making gold less attractive.
But the June outflow of $4.7 billion from commodity ETPs was less than May's $6.3 billion and April's record of $9.3 billion, according to data from BlackRock, the world's largest asset manager. Gold ETP outflows at $4.1 billion accounted for most of the June total.
ETPs, whose value is linked to moves in their underlying assets, are an easy route into commodities for investors and allow asset managers to make swift tactical switches.
Nicholas Brooks, head of research and investment strategy at ETF Securities, said that the biggest hits have come in the U.S.-listed gold ETPs.
"A lot of those holders are hedge funds, and they buy on the margin or leverage their positions. So when the gold price gapped down (in April), they were forced to sell to cover their margin calls," he said.
BlackRock attributed the June exodus to Ben Bernanke's remarks about the U.S. Federal Reserve tapering its bond buying programme, paving the way for an exit from quantitative easing in 2014 if the economy continues to recover.
"Investor behaviour in May and June represents the reversal of some very crowded trades," said Russ Koesterich, chief investment strategist at BlackRock. "The catalyst for this was the change in sentiment around the Federal Reserve."
The Fed's shift in direction prompted investors to sell bonds, pushing up interest rates abruptly. As a result, the S&P GSCI Gold index fell 12.15 percent in June.
"Gold is hypersensitive to changes in real interest rates because rising real rates increase the opportunity cost of holding gold," Koesterich said.
Gold outflows have amounted to $28.2 billion year-to-date, according to BlackRock data. But other commodities also took a hammering in June as the dollar strengthened.
The S&P GSCI, a popular commodities benchmark, fell 3.1 percent on June 20 after the Fed's announcement. Gold, silver, coffee and nickel were into bear market territory, typically defined as a price drop of 20 percent or more over a two-month period.
"Gold is hypersensitive to changes in monetary policy because it doesn't have many industrial uses," Koesterich said. "But the broader statement about sensitivity to real rates also applies to the entire commodities complex."
The broad commodities ETP segment suffered outflows of $295 million in June, BlackRock data showed.
A strong performance in U.S. equities has allowed investors to opt out of commodities, he added: "Because U.S equities have done extremely well, investors have felt that it is not as necessary to take that incremental risk in commodities."
The final nail in the coffin for commodities was the ebbing of inflation fears. "Most realised measures of inflation are falling, and in some cases they are bumping along at historical lows, so there is much less concern about hedging inflation than there was two or three years ago," Koesterich said.
RECORD AUM DECLINE
The unwinding of these positions contributed to a record quarterly decline in the total assets under management (AUM) of commodity ETPs to $127 billion from $186 billion at the end of March, according to data from ETF Securities.
ETF Securities, an issuer of ETPs, attributed two-thirds of the fall in assets to price declines and the rest to outflows. The gold price decline alone accounted for 51 percent of the fall in total assets.
Total net outflows from all commodity ETPs during the quarter were $19 billion, with gold accounting for 97 percent, ETF Securities said.
Brooks of ETF Securities said that gold outflows now seemed to be moderating but added that investors still remained negative on gold.
"We will probably see a continued outflow in the near term, but a lot of the negative sentiment is in the price now," he said. However, if the U.S. economy continues to recover and interest rates rise further, gold is likely to remain out of favour, he added.
The outlook for the rest of the complex depends on whether the recent liquidity squeeze and growth scare in China is temporary or the start of a larger trend, he said.
"If this passes, then copper, platinum and palladium could attract more interest," Brooks said, adding he believed the growth scare was overdone.
At the end of June, BlackRock's data covered 922 commodity ETPs worldwide, worth some $126.4 billion.
(Editing by Jane Baird)
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