July 8, 2013

Gold Gets Blamed for Record Commodity ETP Outflows

Investors cut their gold holdings in Q2 as interest rates and the dollar rose, says ETF Securities

Rising U.S. interest rates and a stronger dollar led to record outflows of commodity exchange-traded products (ETPs) in the second quarter as investors made a swift exit from gold, ETF Securities reported on July 4.

Commodity ETPs saw record outflows as expectations for an early end to Federal Reserve bond buying and a strengthening of the U.S. dollar hit investor sentiment, according to London-based ETF Securities, an ETP provider that specializes in exchange-traded commodities and also has offices in New York, Hong Kong and Sydney.

A sharp decline in the price of gold and large outflows from gold ETPs caused commodity ETP assets to fall to $127 billion, the lowest level since Q2 2010. However, gold ETP outflows peaked this April, and then moderated in both May and June.

“The moderation may indicate that the worst of the gold ETP selling is now behind us,” said Nicholas Brooks, head of research and investment strategy at ETF Securities, in a statement. “Gold and silver will likely remain beholden to views on the Fed’s intentions and the direction of real interest rates. On both counts, we believe investor reactions have been overdone.”

Monthly net outflows from gold ETPs totaled $8.7 billion in April, when bullion plunged into bear market territory, then fell to $6 billion in May and $3.9 billion in June, Brooks told Bloomberg in an interview. Gold dropped 23% in the second quarter, the biggest drop since 1920, according to data compiled by Bloomberg.

China and central banks also are making an impact on commodities.

“The outlook for most commodity flows and prices will likely turn on perceptions of whether the recent liquidity squeeze and growth scare in China is temporary or the start of a larger trend,” Brooks noted in an ETF Securities release.

Last month, the People’s Bank of China turned off the spigot on easy money in an attempt to curtail China’s explosive credit growth. Total credit in China has grown to $23 trillion, growing at a year-over-over rate of 20%, with credit to GDP levels now at 200%.

On Monday, ETF Securities reported that China and central banks have stepped up gold buying, with bargain hunters increasing purchases.

“Forward guidance by the European Central Bank and the Bank of England made it clear that they don’t foresee tightening monetary conditions any time soon,” wrote Brooks and associate Nitesh Shah. “This helped push up the U.S. dollar, which further weighed on precious metals performance. Earlier in the week, the Chinese push to ease the liquidity crunch in China’s interbank market is helping allay fears of a sharp slowdown in China’s growth.”

While rising rates and a strong dollar have been negative for gold price performance, central banks and Chinese consumers appear to view the price weakness as a buying opportunity, say the ETF Securities researchers.

---

Read Why Axel Merk Owns Gold at AdvisorOne.

---

For direct insights on the role of ETFs in client portfolios from multiple experts—including Rick Ferri, Ron Delegge, Skip Schweiss and more—we invite you to register for AdvisorOne’s premiere advisorcentric Virtual ETF Summit, which starts July 23 (and get multiple hours of CFP Board CE).

Reprints Discuss this story
This is where the comments go.