Industrial ETFs steal the shine

Although investors flocked to gold products in 2010 as a perceived safe haven, many are turning towards industrial metals on the back of soaring prices. Paul Burgin reports

Gold still rules the precious metals sector, if not the performance league table. Its less glamorous siblings have generated greater returns for investors in the last year and yet they seem unlikely to upstage gold any time soon.

2010 was a good year for precious metal exchange-traded commodity (ETC) providers, with some $20bn flowing into the sector globally. ETF Securities calculates other ETC sectors, including agriculture and energy, attracted a mere $2.4bn collectively.

Gold continued its long running dominance of the market. It saw investors pour in $15.3bn throughout 2010, accounting for two thirds of all net flows to commodities. Silver attracted $3.1bn, while platinum and palladium attracted $943m and $630m respectively. A further $433m went into diversified precious metals ETCs.

Much of the new business was driven by investor fears about the global economy. Sovereign worries in Europe and wider concerns about inflation pushed investors to seek a safe haven in gold. Scott Thompson, co-head of European sales at ETF Securities, says economic indicators are patchy but improving. As a result, some investors have begun to reallocate away from gold.

Few have sold out altogether though, and most are simply paring down their holdings. On the back of last year’s 29% rise in gold ETC values in dollar terms, some investors have recently found themselves overweight their ideal allocations.

Golden peak
Year-to-date, ETF Securities calculates gold outflows have hit $2.7bn. Thompson says: “Gold experienced fantastic results last year. There was a lot of portfolio reallocation in January. Equities and emerging markets experienced massive increases in allocations. In metals, investors are shifting more towards industrials.”

As a result, platinum and palladium flows have been positive so far in 2011. Investors are betting on continued improvements in automobile sales driving demand for platinum, a vital component for catalytic converters.

Thompson says silver straddles the divide between the inflation protection, safe haven and jewellery attractions of gold and the more practical industrial uses of other precious metals. 

Although outflows from silver have been persistent at $300m year-to-date, this may simply be a sign of investors taking profit. Silver’s rise of 82% was the strongest of all precious metals last year. The increase was particularly good news for dollar and euro investors in leveraged silver ETCs.

Morningstar figures show ETF Securities’ leveraged silver ETC rose 164.25% in the year to early February 2011, with ProShares Ultra Silver not far behind.

Physical palladium products also proved a good call. Sterling investors in JB Physical Palladium nudged 80% gains in the 12 months to 3 February. Swiss franc investors did even better - their palladium ETC values rose almost 100% over the same period.

Not surprisingly, short products were not the best choice over the last 12 months. Short silver was the worst, with values halving. Investors in db x-trackers, ETF Securities and Lyxor short gold products would have seen their investments drop by one fifth had they held their positions for the full year to early February.
Thompson says gold will likely be range-bound over the short and medium term.

The consensus is that political action has bought the euro and eurozone some time, meaning there may be opportunities in risk assets. Yet some investors are still cautious. They are keeping a close eye on credit default swap spreads in periphery Europe, which are now seen as an indicator of when to switch back to gold.