ETF Revival: Precious Metal Exchange-Traded Funds Return to Favor

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Gold, silver and bronze

There is a renewed interest in the commodities sector attributed in part to a desire by investors to buy into continued growth in China and, in another part, due to a diversification from other asset classes back into commodities after four years of declining returns.

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The sense is that metals are at least due a reversal and continued global growth with reduced mining capital expenditures will translate into shortages and rising prices. Well in simplistic terms that rationale could be said to be bearing fruit. Metal prices are up from first quarter lows and several metals that had been in oversupply – aluminum, copper  – or were expected to go into oversupply have probably moved into deficit this year if physical delivery premiums are taken as an expression of relative supply tightness.

ETFs Catch Up

Interestingly, the Exchange Traded Fund (ETF) market seems to be catching up. ETF’s had seen a massive outflow of funds, particularly in precious metals as the gold and PGM prices collapsed. An FT article estimates outflows from US ETF funds, alone, topped $30 billion in 2013 with a further $814 million in outflows in the first half of this year. Precious metal funds remain, by far, the largest commodity ETFs, and understandably saw some of the largest declines. The SPDR Gold Trust, which peaked at $77 billion in August 2011, now stands at just $33.9 billion after the fund sold gold bars to meet redemptions over the past two years.

But in other parts of the world ETF’s have been doing better. Citigroup analyst Aakash Doshi is quoted as estimating net inflows of $5. 3 billon into commodity ETFs so far this year, led by precious metals and products tracking broad baskets of commodities. The figures are drawn not just from the US but Europe, South Africa, India and China as well.

World Market

ETF Securities are quoted in Forbes as reporting Commodity ETF inflows totaled $275 million, up from $271 million of inflows in the first quarter, led by gains coming from the platinum group metals.

“We think we are seeing a turn in investor sentiment towards commodities broadly,” the paper quotes ETF Securities as saying, citing the same drivers as covered in our previous report, improved investor sentiment toward commodities and an expectation China’s mini stimulus will further boost demand in the second half of the year.

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