MW: Investors pouring money into commodities at the fastest rate since 2009
Largely driven by a fever for gold, demand for commodities this year is the strongest it has been since the financial crisis, according to research by Barclays.
Total commodity inflows year to date stands at $50.8 billion, marking the strongest January-to-July performance since 2009 — which was only $1 billion higher, said Barclays in an Aug. 4 note. The bank illustrates how dramatic the turnaround has been for investment flows to commodities in this chart:
Those inflows, along with some hefty price gains, have pushed commodity assets under management to $235 billion, a sizable leap from $161 billion seen at the end of 2015. Based on the most active contract, gold GCZ6, -1.08% is up 29%, while oil prices CLU6, -0.48% are up 12%. Silver SIU6, -2.17% is up 47%.
Read: Why a brewing global economic storm is turning gold into the perfect trade
If 2016 turns out to be positive net overall for net commodity investor flows, it will be the first time in four years. In 2009, flows totaled just $22 billion, as the investment boom in commodities was in its early stages, with inflows totaling $164 billion from 2010-12. But from 2013 to 2016, commodity investment flows were negative.
The second-half curse
The best days for commodity inflows may already be behind the sector, with July inflows likely the high mark, according to the team of analysts led by Michael Cohen. June and July saw a combined $8 billion of commodity investment inflows.
They cautioned that outflows could return this year, even though the scale of inflows seen thus far will probably keep things positive overall.
One reason is that much of the flows reflect safe-haven activity linked to jitters over Brexit and the U.S. presidential election, with precious metals snaring around 60% of all commodity inflows this year. Gold dominates in those flows.
Secondly, Barclays said the demand largely seems tactical. Single commodity exchange-traded products have proven more popular than indexes, especially when it comes to oil and precious metals, with investors trading in and out of those products actively.
Opinion: This breakthrough in ‘blue energy’ could change the world
Finally, returns are starting to taper off. The Bloomberg Commodity Index showed flat returns for the first quarter, a 14% gain in the second, and an 8.4% drop in the third quarter to date.
”One worrying pattern for commodity investors that is relevant here is the tendency for commodity prices and investments to perform fairly well in [the first half of the year] but then to collapse” in the second, said Cohen and the team.
Overall they said expect a flat to slightly lower performance for commodities in the second half of this year, alongside a sharp move lower for copper. And while crude will recover in the final quarter of the year, it isn’t projected to exceed its year-to-date high in the mid-$50s.
Barclays noted “a loss of enthusiasm for being on the long-side of commodity investments” among many asset managers. Some, they said, “tend to move a little faster than those investing in indexes, [exchange-traded products] or structured products.
“It is perhaps telling that those net long positions have already started contracting quite rapidly both in overall terms and as a share of the market,” they said.
