London - Investors pulled $5.6 billion from gold exchange-traded products (ETPs) in February after poor performance by the yellow metal, but appetite for riskier, growth-oriented industrial metals ETPs remained intact.
In February, the gold price dropped for the fifth month in a row, with the S&P GSCI Gold Index off 5.04 percent.
The world's largest gold-backed ETP had its biggest monthly outflow since inception as investors sought better returns.
The exodus from gold pulled down the entire commodities ETP complex, global data from BlackRock showed, as the gold segment
accounts for some 70 percent of total commodity ETP investments.
Some $5.1 billion left commodities ETPs as inflows to industrial metals and broad basket commodity ETPs failed to offset the gold meltdown.
ETPs, an easy route into commodities for investors, include exchange-traded funds, exchange-traded commodities and exchange-traded notes. All trade on a stock exchange and their value is linked to the underlying assets.
The outflows from gold represent the category's largest outflow since the first gold ETP was launched, said Dodd Kittsley, global head of ETP research at BlackRock.
Gold ETP outflows have now reached $6.8 billion in the year to date.
“We attribute this to several factors, including the recent weakness in spot gold prices, a growing sentiment among some investors that monetary tightening from the US Federal Reserve may occur earlier than originally expected, a stronger US dollar, continued investor demand for equities and a shift away from safe haven assets,” he said.
To put the $5.6 billion in outflows into perspective, this still represents less than 4.5 percent of total assets invested in gold ETPs, which currently stand at $128.2 billion, added Russ Koesterich, BlackRock's global chief investment strategist.
“Tactical investors have been paring back their positions in gold but in relative terms the outflows are not that huge,”
agreed Nicholas Brooks, head of research and investment strategy at ETF Securities, an issuer of ETPs.
He believes that gold outflows could reverse given the inconclusive results of Italy's elections, which have increased concerns about Europe's ability to maintain unpopular austerity budgets in the face of rising unemployment and social unrest.
“If there are any indications that some European economies are going to backtrack on their debt plans we could see a negative reaction by the bond markets and a move back into gold as a safe haven,” Brooks said.
He added that the net speculative positioning in gold futures is now at end-2008 levels, which could serve as an attractive entry point for some investors.
Industrial metals and broad commodity ETPs attracted inflows of $125 million and $113 million respectively, and white metals such as silver and palladium continued to do well.
“As investors increasingly expect a better growth scenario, they also expect the industrial usage of these metals to grow,” said Kittsley.
Brooks noted that copper and nickel ETPs had also proved a draw. “Investors have by no means given up on commodities - they've been rotating away from the more defensive assets into the more cyclically geared assets,” he said.
But energy commodity ETPs failed to benefit from this switch to more growth-oriented assets, with outflows of $218 million.
This reflected a fall in oil prices with the S&P GSCI Crude Oil index down 6.11 percent for the month.
US crude oil prices came off after domestic production and inventory levels continued to build.
Meanwhile, February's OPEC crude oil output was up for the first time since October with higher exports from Iraq and a slight increase in supply from Saudi Arabia.
It was a different story for energy equity ETPs, which enjoyed inflows of $541 million in February.
Oil and gas equipment and service sector stocks, and oil and gas pipeline operators in master limited partnerships (MLPs) were key beneficiaries, Kittsley said.
Energy infrastructure companies tend to have a long-term service contract and relatively fixed cash flows. But because
the cost of making repairs to infrastructure is low relative to
the companies' income, they normally return cash to investors.
“Many ETPs in this space offer attractive dividend yields, particularly with respect to MLPs, and the increase in flow may be a reflection of robust demand for high dividend paying equities,” Kittsley said.
At the end of February, BlackRock's data covered 925 commodity ETPs worldwide, worth some $187.9 billion. - Reuters