Commodity investment seen by Barclays set for record outflow

December 18, 2013 05:05 AM

Commodity investments are heading for record outflows driven by withdrawals from gold exchange-traded funds as some investors lost faith in the traditional store of value, according to Barclays Plc.

Assets under management declined $88 billion since the start of the year through last month, Barclays said in a report e-mailed today. Net outflows reached $36.3 billion, also set for a record decline, it said. Investments in precious metals slid 40% since 2012 to $119 billion.

“If precious metals ETPs are excluded, the picture is a lot more positive,” Barclays analysts led by Kevin Norrish wrote in the report. “Nevertheless we view 2014 as likely to be another difficult year for commodity investors as any clear and sustainable trends in prices will likely be few and far between.”

The Standard & Poor’s GSCI gauge of 24 raw materials dropped 3.2% since the start of 2013, headed for the worst year since the 43% drop in 2008. Fifty-three out of 67 commodity indexes tracked by Bloomberg are down this year as copper (COMEX:HGH14) to corn (CBOT:CH14) tumbled into bear markets as supply surged.

Worst Year

Gold (COMEX:GCG14) and silver (COMEX:SIF14) are headed for the worst year since 1981 as the U.S. Federal Reserve prepared to trim its stimulus program and investors lost faith in precious metals as a store of value. Gold for immediate delivery fell 26% this year to $1,239.47 an ounce in London.

“Gold ETF liquidation accelerated recently, and there is more to come, particularly in the run-up to the tapering,” Norrish said in a telephone interview today. “The likelihood of further liquidation of gold and silver exchange traded products is high going into the next year.”

ETP holdings backed by bullion slumped 32% this year to 1,802.46 metric tons, poised for the first outflow since the funds started trading in 2003. A further 311 tons will be withdrawn next year, a Bloomberg survey of 11 analyst estimates showed.

Another 100 tons of ETP holdings start to lose money at $1,200 an ounce, making this level “sensitive” for gold, Norrish said. About 1,000 tons was added to gold-backed ETPs when prices were between $900 to $1,000, he said.

Excluding precious metals ETPs, commodity index swaps and ETPs had almost $4 billion of net inflows this year through November, setting index-linked investments on track for the first positive year in three, Barclays said.

‘Significant Inflows’

“This suggests that lower carry costs and more diversified correlations with other assets are partly offsetting this year’s negatives,” including slower growth in China and rising supply, Barclays said. “If the environment for commodities improves, significant inflows from both institutional investors may resume next year.”

China’s economic growth will slow for a fourth year in 2014, the International Monetary Fund estimates. Next year’s 7.25 %expansion will be half of the 14.2% growth China’s economy saw in 2007, the IMF forecasts.

Industrial metals will beat oil and precious metals in early 2014, according to the report. Aluminum and lead will move into deficits and surpluses in zinc and nickel will shrink “dramatically,” Barclays estimates.

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