July 4, 2013 / 3:31 PM / in 5 years

Investors flee commodities in June as Fed signals end to stimulus

* Gold outflows at $4.1 bln for June, $28.2 bln YTD
    * Record quarterly AUM decline on sharp fall in gold price
    * Rise in real interest rates prompts commodity unwinding

    By Claire Milhench
    LONDON, July 4 (Reuters) - 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
    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
    "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.
    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 $126.4 billion. The following table
shows global commodities ETPs at end-June (US$ mln):   
 SECTOR                              FLOWS       ASSETS
 Broad/Diversified                   -295        17,078
 Agriculture                         -132        5,223
 Energy                              -90         7,589
 Industrial metals                   6           2,207
 Gold                                -4,122      79,189
 Silver                              -67         10,603
 Other precious metals               -18         4,533
 Precious metals total               -4,206      94,325
 TOTAL COMMODITIES                   -4,717      126,423
 Source: BlackRock

 (editing by Jane Baird)
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