Gold sparks decline in global commodity

Assets under management for global commodity exchange-traded products posted a record quarterly decline in second quarter mainly due to a fall in both prices and holdings for one specific market — gold, ETF Securities said Thursday, according to Forbes.


Total commodity ETP assets fell to $127 billion in the last three months, down from $186 billion at the end of the first quarter, said the provider of exchange-traded funds.


“Two-thirds of the decline in commodity ETP assets was caused by price declines and one-third by outflows,” said Nicholas Brooks, head of research at ETF Securities, in an interview with Kitco News.


Assets under management for gold ETPs fell to $82.3 billion at the end of the second quarter from $131 billion at the end of the first. Silver ETP assets fell to $11.1 billion from $17.7 billion.


ETF Securities calculated the data on assets for all ETPs around the globe, not just those in North America. The firm also listed the figures in dollar amounts rather than physical volume, to have a consistent method of comparison since various commodities trade in different units, such as ounces for gold, bushels for grains and barrels for oil. Also, whereas some ETPs such as metals hold physical commodities, others do not and trade on the basis of futures contracts instead.
Otherwise, looking strictly at physical holdings, gold ETPs held 67.9 million ounces at the end of the second quarter, down from 80.9 million at the end of the first, Brooks said.


Total net outflows from commodity ETPs (actual selling only) amounted to $19 billion in the second quarter. Gold accounted for $18.5 billion, or 97%, of the total ETP selling. This was the largest outflow from gold ETPs since the first one was created in 2003, ETF Securities said.


“The bulk of those outflows were in April and out of US-listed gold ETPs,” Brooks said. “In May and June, the outflows in gold ETPs moderated quite significantly.”


Gold ETP outflows in April were $8.7 billion, then $6 billion and $3.9 billion the following two months, he said. The slower pace of outflows since April “indicates to me that it is possible the worst is behind,” Brooks said.


Of the $8.7 billion in outflows for April, $7.7 billion were from North America, or 89% of the total. By contrast, North America typically accounts for a smaller 59% share of global gold ETP holdings, Brooks explained.


Rising real interest rates in the U.S. as a result of improving growth prospects and expectations of a reduction to Federal Reserve’s bond-buying program, together with a strengthening U.S. dollar, caused the gold price to fall 21% over the quarter, ETF Securities said. Tactical and momentum investors sold ETPs into the price correction.


“It appears a large driver of the gold outflows in the second quarter was a panic sell-off by U.S. investors in gold ETPs,” Brooks said. “I’m guessing a part of it is there are quite a lot of hedge funds in the U.S. gold ETPs. I suspect when they saw a very sharp drop in the gold price in mid-April, many of these investors may have had margin calls, which forced them to sell even more aggressively.”


This led to a decline in ETP holdings at a time when sales of coins picked up on the price decline, he explained.