Emerging markets turmoil drove investors away from commodity exchange traded products (ETPs) in January due to concerns about demand growth, but gold outflows slowed as its safe haven status was revived.
Some $1.7 billion was withdrawn from commodity ETPs in January global data from BlackRock, the world’s biggest asset manager, showed. ETPs, whose value is linked to moves in their underlying assets, offer an easy route into commodities and allow asset managers to make quick, tactical shifts.
Emerging market assets faced intense selling pressure last month following the U.S. Federal Reserve’s decision to wind down its monetary stimulus. This will remove some of the cheapmoney that has flooded into developing economies over the last five years in search of better returns.
Emerging market equity ETPs ended January with $10 billion of outflows, the largest monthly outflows on record, BlackRock said. Investors were particularly concerned about countries with high current account deficits – Brazil, Indonesia, India, Turkey and South Africa.
“A number of central banks in developing countries have tried to stem the general flight to quality by raising interest rates, but this has largely served to increase worries over growth and stability for weaker economies,” BlackRock said.
If growth weakens, this could reduce the demand for energy, agriculture and base metals. A softer-than-expected Chinese manufacturing PMI reading of 49.6 contributed to the sell-off, as this confirmed lingering fears of a slowdown in domestic demand, Black Rock added.
GOLD BEGINS TO PERFORM
Meanwhile gold ETP outflows slowed to $860 million from $3.6 billion in December. “Investors turned to gold as emerging markets turmoil accelerated,” said Nick Brooks, head of research and investment strategy at ETF Securities, an issuer of ETPs. “We saw that in the price performance. It was one of the few assets to see a positive return in January.”
The S&P GSCI Gold index was up 3.1 percent in January, whilst the S&P 500 was down 3.6 percent, its worst monthly decline since May 2012. Gold also outperformed bonds and the dollar. Brooks noted that inflows into gold ETPs on the ETF Securities platform hit their highest level in five months in the week ending Jan. 30, at $44 million.
Silver attracted global net inflows in January of $55 million after starting the year at below $19 an ounce. “It’s seen as a good entry point,” Brooks said.
“And with the gold price stabilising and starting to rise, silver is seen as a higher beta way to play this improving sentiment towards gold.” Silver has a higher volatility than gold so if gold is expected to rise, tactical investors will often move into silver more aggressively, he said.
Surprisingly given the emerging markets sell off, industrial metals ended the month with net inflows of $143 million, but Brooks said this masked a change in sentiment mid-month. In early January, there were strong flows into copper and nickel but these tailed off as emerging market problems mounted.
The S&P GSCI industrial metals index was down 4.3 percent in January, with aluminium suffering the biggest hit.
On the energy side investors pulled money from natural gas ETPs after strong price gains due to weeks of sub-zero temperatures in North America, which ran down stocks. “We saw some big inflows into natural gas ETPs at the end of 2013 and now they are selling to make a nice return,” Brooks said.
In February investors have continued to put money into gold ETPs, there have been inflows into short natural gas ETPs and some flows into coffee and sugar, according to data from ETF Securities. “But we need to see some stabilisation of the situation in emerging markets before investors are ready to move in more aggressively,” Brooks said.
Source: Gold Silver Reports