Once again, precious metals were in 2008 the only commodities with a negative correlation to equities; while investors are swinging from short oil positions to long.
In its review of commodities for 2008, ETF Securities Limited points out [even though it might not currently feel like it] that commodities outperformed most equity benchmarks, with gold standing out as a particularly strong performer. Correlations among asset classes rose sharply as the mass migration from the sector when investors fled from risk meant that the selling was across the board. On a longer term basis, however, the average correlation between commodities and other asset classes remains low. The all-commodities index’ correlation with the S+P 500, for example was just 0.10, while that of the precious metal sub-index was minus 0.4. Apart from some hedge fund indices and most of the selected currency exchange rates, this was the only sector with a negative correlation to the equities. The Review, which has a raft of comparative and absolute tables for perusal, can be found at ETF Securities’ Commodities Review 2008
Short term volatility rose sharply across asset classes. On a ten-year moving average basis, equity volatility remained the highest, followed by real estate, commodities, foreign exchange, hedge funds and bonds. Within the commodities, the Petroleum sub-index had the highest volatility at 33%, closely followed by the energy sub-index. The precious metals sub-index was towards the bottom of the range at 19%, undershot only by agriculture and livestock. Volatility in the equity indices ranged between 19% and 25%. Once again, on a combination of price return and volatility, gold emerged the clear winner.
In terms of the organisation’s flows, assets under management at ETF Securities at the end of November 2008 stood at approximately $6 billion, with organic growth rising by nearly 25% over the year, despite the market turmoil. Naturally the assets under management followed the movements in the markets as a whole, with strong growth in the first half of the year and declines in the second half. Precious metals are far and away the most popular sector. At the end of November, the precious metals occupied 84% of the assets under management, with agriculture taking up 9% and energy, 4%. Combined flow in the ETFS Physical gold instrument and into the gold bullion securities rose by $1.6 billion (which is currently equivalent to 59 tonnes). Base metals, agriculture and livestock were just 1% each, although the company reports that recently the energy ETCs, both long and short, have been gaining prominence in both flows and trading volumes.
Between the end of September and the end of November the cumulative return of minus 11% in the DJ-AIG Total Return Sub-Index (which comprises gold and silver) outperformed most other asset classes; the exception, of course, was the bond market. There was a strong uptrend in net inflows into the ETFS Physical gold, gold bullion securities and the ETFS Physical silver since August, although the economic outlook has dragged platinum and palladium, which have underperformed the Precious Metals Total Return Sub-index by 31% and 39% over the past year.
Gold, by contrast, outperformed the DJ-AIG Industrial Metals Total Return Sub-Index by 85% over the past twelve months. On a longer-term basis, the top performer among the (for example) three-year cumulative returns in the ETFS Precious metals was leveraged gold with 66%, while the physical gold fund generated 64%. Silver returned 18%, while the PGMs, unsurprisingly, were negative at minus 12% for platinum and minus 28% for palladium.
The DJ-AIG Industrial Metals Total Return sub-Index and the three months-forward equivalent dropped by 44% and 43% respectively over the twelve-month period, despite the sharp increase prices in the first quarter of the year, driven by emerging markets demand and a series of supply disruption, notably the power problems in South Africa, Latin America and China, along with high oil prices and freight rates. Both of these are now sharply lower. Light crude is down by 70% since its high on 14th July, while the Baltic Dry Freight rate has dropped by 93% since its high on 20th May.
There has, however been a dramatic switch over the year from short energy positions, particularly oil, to long positions. In early April – July the short crude oil ETFS saw inflows of almost $300 million, but as oil has fallen below $40 the short ETFS has been sold and approximately $200 million has gone into long energy ETCs, especially crude oil. Although the price has not yet responded to the latest production rate cut, sentiment among investors is, by the look of it, on the turn. Next week’s Commitment of Traders figures from the CFTC may well make interesting reading.