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Commodities find favour in Q3 with growth-hungry investors

* Fed's surprise decision fails to stem gold outflows

* Beaten down cyclicals seen as good bet

* Silver, coffee in favour after sharp price falls

By Claire Milhench

LONDON, Oct 7 (Reuters) - Broad commodity exchange-traded products (ETPs)

returned to favour in the third quarter, attracting some $712 million according

to BlackRock data, as investors sought out assets thought likely to benefit from

a pick up in economic growth.

Equity ETPs also continued to do well, capturing some $28.7 billion in

September, whilst fixed income ETP inflows totalled $6.6 billion. Overall,

global ETP inflows reached $35 billion in September.

But money continued to bleed from gold ETPs, which racked up $1.2 billion in

outflows in September, taking third-quarter redemptions to $4.4 billion. This

was despite the U.S. Federal Reserve's surprise announcement in mid-September

that it would continue with its bond-buying programme.

"September was a challenging month for gold prices, which fell approximately

4.9 percent," said Dodd Kittsley, global head of ETP research at BlackRock.

"Over the short term, we may see further volatility around current levels as

headwinds remain, including potential QE tapering later this year, which may

weigh on prices," he said.

ETPs, whose value is linked to moves in their underlying assets, are an easy

route into commodities for investors, and allow asset managers to make swift

tactical switches.

Nick Brooks, head of research and investment strategy at ETF Securities,

said that steady improvement in the U.S. manufacturing sector and increased

confidence that China would maintain healthy economic growth had encouraged

strong inflows to the broad basket commodity ETPs in September.

"Investors have more recently looked for laggard cyclical assets, and

commodities fall into that category," Brooks said. "This year U.S. equities have

done very well and some investors believe it's getting a bit stretched so they

are looking for other cyclical assets that haven't run yet."

Industrial metals failed to attract much interest, however. The segment

ended the quarter with $197 million of outflows. Brooks said the base metals

were seen as less attractive for fundamental supply and demand reasons.

"Aluminium has been in over-supply and analysts have forecast surpluses in

copper," he said. As a result, investors have preferred to play the pickup in

economic growth through the broad ETPs, silver and platinum.

Silver enjoyed inflows of $736 million in the third quarter, according to

BlackRock data. Year to date, inflows stand at $1.2 billion, compared with

outflows of $33 billion from gold ETPs.

"We attribute this divergence in part to the higher sensitivity of silver to

global economic activity due to its higher industrial usage," Kittsley said.


The price of silver has fallen more than 50 percent from its peak to

around $20 an ounce, which Brooks said was roughly equivalent to the all-in cost

of production. "That's viewed as a pretty firm medium-term floor."

Brooks added that the volatility of silver appealed to some investors: "It

rises very sharply once it gets moving."

Agriculture ETPs also found favour, ending the quarter in positive territory

with $99 million of net inflows. Brooks said that sharp price declines and

negative speculative futures positioning had attracted investors willing to wait

some time for prices to rise back towards the mean.

He added that coffee ETPs had attracted a bumper $70 million in the third

quarter after the price of Arabica coffee hit a four-year low on

the back of a record crop in Brazil.

Energy ETPs ended the quarter in positive territory, with $261 million of

inflows, but it was a bumpy ride with competing factors in play. Crude oil ETPs

suffered outflows in September as momentum players took profits following a

rally in U.S. crude prices earlier in the quarter.

Going into October, the impasse over the U.S. debt ceiling has presented

investors with a fresh dilemma. For the time being, they seem happy to continue

increasing their positions in the beaten-down cyclicals, but if the stalemate

persists, gold is likely to move back into the spotlight, Brooks said.

"The battle over the U.S. debt ceiling has led to increased uncertainty

regarding equity markets among investors," BlackRock's Kittsley added. "Gold has

historically been used as a safe-haven vehicle during such periods and may

benefit as investors seek to diversify their risk."

At the end of September, BlackRock's data covered 919 commodity ETPs

worldwide, worth some $133.8 billion. Data from ETF Securities also reflect

global flows, with assets totalling $135.9 billion.

Global commodities ETPs at end-September (US$ mln)


(BlackRock) (BlackRock) (BlackRock) Securities)

Broad/Diversified 539 18,146 712 779

Agriculture/Livestock 76 5,319 99 111

Energy -93 8,102 261 377

Industrial Metals 17 2,053 -197 -195

Gold -1,169 82,496 -4,424 -4,173

Silver 23 12,971 736 706

Precious Metals Total -1,170 100,220 -3,874 -3,376

TOTAL COMMODITIES -630 133,840 -2,999 -2,304

Sources: BlackRock, ETF Securities