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.”
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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%.