ETF investors pour into commodities for third year on global growth bet

Exchange-traded fund investors are betting on synchronised global growth to improve the outlook for commodities from copper to natural gas in 2018.
ETFs linked to raw materials attracted about $450mn this month as of Dec. 21, on track for a third straight annual inflow, the longest streak since 2010. Money is still pouring in even as the Bloomberg Commodity Index falters after a surge last year.
Goldman Sachs Group analysts said the outlook is brighter over the next year, as they predict the sector will post a 7.5% return.
The International Monetary Fund forecast in October that the global economy will grow 3.7% next year, after expanding 3.6% this year, helping fuel demand for raw materials. While China’s anti-smog drive is seen slowing the nation’s growth in 2018, it’s also curbing supply of raw materials as the government shuts smelting plants that fail environmental standards. That’s helping set industrial metals on course for the biggest annual gain since 2009.
“We’d see resumption of inflows going into 2018 because the outlook is certainly very bullish and very positive for commodities,” Maxwell Gold, a director of investment strategy at ETF Securities, which oversees $2.5bn in assets in the US. “The outlook is certainly very bullish.”
Even natural gas, the worst performer among the 22 raw materials on the Bloomberg Commodity Index, is attracting money, helping set energy ETFs on course for the first monthly inflow since June. This month investors have poured $495mn into Credit Suisse Group’s VelocityShares 3x Long Natural Gas ETN, which provides three times the daily returns of an S&P index tracking natural gas futures. That would be the biggest monthly inflow in three years.
“Winter, which started on November 1, is in a position to finally expose the underlying tightness of current fundamentals’’ in natural gas, Societe Generale analysts led by Michael Haigh said in a report last month.
While precious metals continue to draw most of the money invested in commodities, inflows have slowed to about $140mn in December, less than half the money that came in a month earlier. Haven demand is waning amid optimism that President Donald Trump’s tax overhaul will boost corporate profits, helping drive US equity indexes to record highs this year.
While Goldman is predicting bullion prices will slide to $1,200 an ounce by mid-2018, Trey Reik, a senior portfolio manager at Sprott Asset Management, is optimistic investors will pile back into the precious metal.
“Given heightened market expectations for tax reforms, Republicans may have sowed their undoing, leaving financial markets ripe for disappointment in 2018,” Reik said.
“Growing recognition that the 2017 tax bill will contribute an additional $1.5tn to the ever-deteriorating US fiscal position should further pressure the US dollar, already suffering through its worst annual performance since 2003. In our opinion, gold markets are likely to take notice.”
Palladium has climbed more than 50% this year, leading gains among 34 raw materials tracked by Bloomberg, as consumption of the precious metal used to curb pollution from gasoline-fuelled vehicles continues to outstrip supply.
The tightness has spurred a robust borrowing market among users and speculators, making it profitable for traders to draw supply from ETFs. As a result, holdings in palladium-backed ETFs have shrunk 21% this year, as they hover near the lowest in more than seven years.