Last week, ETF Securities released the Global Commodity ETP Quarterly for Q2 2012. Since silver prices are set by the futures market, sentiment and trends are often gauged by assessing those investors and their activities. This publication provides insight on the silver market from the ETF investors’ perspective.
Silver ETF investments decline in Q2
The first quarter (Q1) of 2011 was rife with positive data coming out the US, often widely exceeding expectations. China was also maintaining in a fashion whereby many were able to insist that the nation was not experiencing a slowdown. A more positive macroeconomic picture resulted in investors who were much more optimistic and open to risk than they currently are. There were $623 million of net flows into silver ETFs during this quarter.
Q2, in many ways, was a completely different story. Conditions in the US appeared to be either stagnating or deteriorating. Indications of a contraction in China grew until there was a near consensus that a slowdown occurring. To add to matters, the eurocrisis appeared to be deepening. From April to June, the data shows ETF investors de-risking and as they did so, the net flows for silver ETFs during the quarter only amounted to $269 million.
Silver ETF investors
With silver ETFs, inflows and outflows tend to be dominated by US investors. “There are some big silver buyers in Europe but for the most part European investors have never really become widely involved in silver investing,” Nicholas Brooks, Head of Research and Investment Strategy at ETF Securities told Silver Investing News.
“For that we can maybe go back to historic reasons. Silver has been used in the US as currency. And, many people in the US view silver in a similar manner to how they view gold,” he explained.
Brooks also said that retail investing is evolving in Europe but most of the region’s ETF investors are institutional investors. In the US, on the contrary, there is a much more developed and active community of retail investors.
The strong performance of silver ETFs in Q1 was largely driven by US buying. $591 million was invested in silver ETFs in North America while only $27 million came from Europe. The remaining $5 million came from investors in other regions.
However in Q2, of the $269 million in net flows to silver ETFs, only $43 million came from North America. $224 million was invested in Europe and $2 million elsewhere in the world.
A slight outflow of $7 million was seen from North America in March. By April, it was a flood with $129 million pouring out of the silver market. In May, there were again net inflows, though they only amounted to $40 million. In June, the appetite for silver ETFs increased more than 3-fold over the previous month to $132 million. North American investors’ appetite for silver ETFs was clearly weaker in Q2 than in Q1.
European silver ETFs have had net outflows only one month this year. That occurred in February, which is when silver prices hit their 2012 peak and when the market also experienced the sharp sell-off known as the Leap Day massacre, sparked by disappointment that the Federal Reserve did not indicate further quantitative easing. Otherwise, inflows have increased every month in H1.
In May, the $40 million of inflows nearly matched those in North America. Then in June, when the soured appetite of US investors largely returned, that in Europe nearly matched it again with investments of $114 million.
Consistent with the trend, inflows doubled from $1 million in May to $2 million in June for the other regions. But, overall interest in silver ETFs in these areas has been minimal. Through June, inflows in ETFs in the “other region” group total $8 million. There have not been any months of net outflows though in April these markets were flat.
According to Brooks, much of the strength in June is the result of it it really beginning to set in with investors that the macroeconomic situation was deteriorating.
Following a string of disappointments, June was the month when the Fed decided US economic conditions warranted action in the form of extending Operation Twist.
That brings us to the the part of the silver ETF investment story that remains the same. Investors began the year expecting accomodative monetary policy and they are still largely expecting significant easing from the Fed.
“Many people are looking for silver being a high beta play on gold later in the year when they expect to see QE3,” Brooks said.
So what happens if there is no further quantitative easing?
“You will probably see outflows from silver ETFs,” says Brooks.
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any company mentioned in this article.