Citi’s Alan Heap believes that the commodity super cycle will continue, despite fears of a potential global slow-down. Investments are already rebounding and ETF-investment trends in particular could become even more a driving force for prices than they’ve been in the past.
Commodity Investments Rebound — We estimate commodity investments at around USD250bn, back to the highs of mid 2009. During the global financial crisis the value of investments halved, but due more to collapsing commodity prices than fund outflows. Latest data show a reduction in net investments, reflecting a broad reduction in risk appetite driven by macro concerns in Europe and China. Notably, gold holdings have been least affected. We expect this to be a temporary pullback.
ETFs — Gold dominates physically backed ETFs. However, the launch of a base metal (aluminium) ETF could be an important source of further investment demand growth. The main hurdles are financing and warehousing costs.
The Future — We believe investments will be an increasingly important component in commodity markets, at least for the duration of the super cycle. There will be an increasing trend to more active investment strategies.
Gold ETF investment accounts for 90% of the commodities ETF market according to Alan Heap. Gold ETF flows surged during the crisis, plateaued, and have started to tick up most recently.
For Platinum, he believes that it’s pretty clear how an increase in ETF demand during the end of 2007 and early 2008 drove prices upward. Notice how the platinum price fell (red line) as ETF holdings fell (light and dark blue areas).
With Palladium the relationship isn’t so obvious, but it seems that at times increases in ETF investment holdings may have driven prices up. (rather than industrial demand doing so… palladium is used for catalytic converters)
Silver is a bit of a tricky beast as well, when it comes to determining how ETF investment has driven price moves.
Net-net, fund flows and investment trends (whereby commodities are increasingly seen as a part of a standard diversified portfolio) are in your favour, in addition to the global commodities ‘super cycle’ betting on Emerging markets’ growing consumption.
(Via Citi, Commodity Fund Flows, Alan Heap, 11 May 2010)